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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 4, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 000-22221
FIELDWORKS, INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota 41-1731723
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7631 Anagram Drive, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 974-7000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class On Which Registered
------------------- ----------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on
March 23, 1998 as reported on the Nasdaq National Market, was approximately
$18,507,304. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. The determination
of affiliate status for purposes of this paragraph is not necessarily a
conclusive determination for other purposes.
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of March 23, 1998 was 8,780,526.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
January 4, 1998 are incorporated by reference into Parts II and IV. Portions of
the Proxy Statement for the Registrant's 1997 Annual Meeting of Shareholders to
be held May 20, 1998 are incorporated by reference in Part III.
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<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
FieldWorks designs, manufactures, markets and supports portable computing
platforms and computer system solutions for use in demanding field environments.
The Company's portable computing platforms have been designed to meet military
standards for ruggedness and to function despite exposure to extreme
temperature, mechanical shock, vibration and moisture. The Company's computing
platforms are expandable through multiple expansion slots to provide a flexible
electronic "toolbox" that can integrate a user's application-specific,
multi-media and communications needs into one portable, rugged device. The
Company's products have been designed with a modular system configuration that
allows a user to easily upgrade the central processing unit, processor or any of
the other technological components without purchasing a new computer. Further,
the Company has the ability to customize its computing platforms to meet the
unique needs of its customers.
The Company targets markets requiring portable computing platforms that can
perform multiple functions, including diagnostics, data acquisition, electronic
testing and monitoring, and simultaneously provide communications and computer
capability even under adverse conditions in the field. The Company believes that
its rugged computing technology has enabled its customers to create new
applications that improve the productivity of their field personnel and believes
further that additional markets and customers will develop as more businesses
recognize the benefits of providing field personnel with effective,
sophisticated computing power.
FIELD COMPUTING MARKET
Due to rapid technological advances over the past several years,
organizations have become increasingly dependent on mobile computing and
communications devices, such as portable computers, pagers and cellular
telephones, to enhance workforce productivity. Organizations are increasingly
seeking to computerize field personnel. Such computerization can provide
sophisticated field diagnostic and analytic capabilities, enhance field access
to data and on-line information, eliminate paperwork and improve electronic
dispatching and communication.
Industries such as transportation, utilities, public safety, military and
medical have recognized the need for computerization and automation in the
field. However, the effectiveness of field force computerization and automation
efforts has often been limited by the nature of the products that have been
available. Computers are now being used in the field to perform a wide range of
tasks, but both off-the-shelf, consumer portable computers and custom-designed
portable computers generally have significant shortcomings that limit their use
by field personnel. In part as a result of these limitations, some companies
still prefer to employ only single-purpose diagnostic and data collection
machines in the field, foregoing the benefits of full computerization.
The field force automation markets for the Company's products consist of
those businesses and other entities that are seeking effective mobile computing
platforms for field personnel and functions. Users of the Company's field
computing platforms and their demands vary widely, and include: (i)
transportation/heavy equipment, which needs diagnostic service tools in a single
PC-based tool with integrated software modules and hardware peripherals (ii)
utilities and telecommunications test crews, which require electronic toolboxes
that can perform data acquisition, diagnostic, communications and analysis tasks
to expedite installation, repair and troubleshooting, (iii) public safety, which
use computers as mobile data terminals that link into central dispatch, (iv) the
military, which needs mobile units capable of withstanding battlefield
conditions, and (v) medical, where medical testing and diagnosis, including
ultrasound capabilities, can be moved out of the hospital and into the doctors
office. Customers have found a wide variety of specific uses for the Company's
rugged computing platforms in the field.
<PAGE>
FIELDWORKS PRODUCTS
DESIGN CHARACTERISTICS
The Company has focused on delivering products that address the varied and
specialized requirements of field force personnel. The Company's products
feature the following four critical design characteristics that it believes
purchasers of field computing platforms require.
Rugged. The Company's computing platforms have been designed to meet
military standards of ruggedness, and to function despite extreme temperatures,
mechanical shock, vibration and moisture. The Company achieves this by using,
among other things: (i) high-strength cast magnesium chassis, (ii) special shock
absorbers for internal components, (iii) durable gold-plated interconnect
systems and (iv) rubber sealing.
Expandable. The Company has focused on providing computing platforms that
are expandable to accommodate both current and future needs of the field force
user. The Company's computing platforms allow for the integration of
application-specific equipment, including auxiliary test, measurement and
diagnostic subsystems and multi-media and communications modules.
Upgradeable. The pace of change in technology such as processors, memory
and display methods can rapidly render non-upgradeable computers obsolete.
Unlike typical consumer portable computers, the Company's computing platforms
are designed to be easily upgraded using standard component parts. The
modularity of the Company's computing platforms allows for easy replacement of
all major subsystems, including processors, screens, disk drives, memory and
keyboards, thereby extending the useful life and reducing the overall cost of
ownership.
Customizable. Many of the Company's customers have unique needs that
require some degree of customization, from the incorporation of unique functions
to the design and production of special purpose machines. The modular design of
the Company's computing platforms allows the Company to readily adapt its
machines to a customer's specifications. Customization has ranged from fairly
simple mechanical adaptations to sophisticated electrical and mechanical
modifications.
PRODUCT SERIES
7000 Series Field WorkStation Laptop Computing Platform. The 7000
Series offers significant expansion capacity and is targeted at the high end of
the rugged field computing platform market. The structure of this laptop
computing platform is based on a high-strength cast magnesium alloy external
housing. Internal components that are sensitive to shock and vibration are
contained within this housing and isolated with special tuned shock absorbing
polymers, while a shock absorbing bushing system suspends all drives and the
CPU. The 7000 Series incorporates the Company's backplane/card cage design,
which provides up to six ISA/PCI expansion card slots within the housing. These
slots permit the integration of instrumentation, data acquisition and
communications capabilities in the computing platform. Also contained within the
housing are PCMCIA expansion capability, integrated AC/DC power, battery
capability, desktop ISA/PCI slots, optional integrated CD-ROM, optional dual
removable hard drive system and optional Motion Picture Experts Group
("MPEG-II") video compression decoding boards. The units in the 7000 Series
weigh approximately 14 1/2 pounds.
5000 Series Field WorkStation Notebook Computing Platform. The 5000 Series
is designed to meet the needs of those customers with uses that require a
smaller, more lightweight toolbox but do not require the same degree of
expandability. The structure of this notebook computing platform is based on an
internal frame cast from a high-strength magnesium alloy. The skeleton and
rubber coating protect internal sub-systems from shock and vibration. In
addition, some of the internal subsystems are suspended by a shock absorbent
bushing system. Virtually all of the electronics of the 5000 Series are
contained in a "technology module" that has been designed for easy removal,
making it possible for customers to service the units themselves and simplifying
upgrades. In addition to two optional ISA or PCI expansion slots, all computing
platforms in the 5000 Series have four universal bays in two sizes. The two
larger bays can house batteries, CD-ROM drives, an internal AC adapter, hard
drives or floppy drives. The two smaller bays can house removable drives and/or
PCMCIA slots. 5000 Series units weigh approximately 10 1/2 pounds.
<PAGE>
SERVICE AND SUPPORT
The Company maintains a service and support program for the benefit of
its customers. The Company's staff is available to monitor order status, to
provide troubleshooting, to provide product information and to answer technical
questions and questions on post-installation issues. The Company provides a
one-year warranty program under which the Company agrees to diagnose, repair and
test any product. In addition to the standard warranty, the Company also offers
limited warranty programs for extended periods. The Company can provide
replacement unit pools for large volume customers to minimize downtime. Software
integration, including load and test of multiple software applications, can be
provided to manage potential communications conflicts. The Company provides
product training, either at the Company or at the customer's site.
STRATEGY
The Company's vision is to be the worldwide leader in customer-specific
computing solutions for demanding field environments. The Company's strategy
consists of the following key components:
Penetrate Key Vertical Markets. The Company is seeking to penetrate
key vertical markets including transportation, utilities, public safety,
government/military and medical. Where appropriate, the Company develops
specialized product features and functions to address the special needs of
a particular vertical market. The Company intends to employ a variety of
approaches in these various markets, including building strategic original
equipment manufacturer (OEM) relationships and focusing on relationships
with large volume repeat customers, depending on the characteristic
purchasing patterns of each vertical market.
Expand Direct Sales Force. The Company intends to focus the efforts of
its direct sales on its stated key vertical markets. The Company believes
that its products are attractive to customers within these markets given
the Company's ability to customize its computing platforms for specialized
needs and the ease with which the Company's computing platforms can be
upgraded and standardized throughout an organization. The Company believes
that its ability to accommodate developing technologies addresses the
concerns many large organizations have regarding the impact of
technological obsolescence in the context of large computer equipment
investments.
New Product Development / Product Enhancements. The Company has made
a substantial investment in developing its current computing platform
technologies. The Company intends to leverage this expertise while
expanding its technical resources to develop new products and enhance
existing products. The Company is currently developing additional series of
computing platforms designed to address broader customer preferences for
products with varying degrees of expandability, size and price, all of
which provide users with the customization, processing power and ease of
upgrade that characterize the Company's current products. The Company has
introduced the prototype of the 2000 Series, a mobile embedded server
product for in-vehicle applications. This product is currently in
development. The Company is also working to add new features and functions
to its existing products.
MANUFACTURING
The Company's manufacturing process consists primarily of the mechanical
subassembly, final assembly and testing of components and subassemblies acquired
from third party suppliers and subcontractors. These functions, along with the
final packaging of its products, are performed at the Company's worldwide
headquarters in Eden Prairie, Minnesota. The Company generally assembles
products according to its customers specifications, as orders are received. This
enables the Company to provide each customer with a computing platform that
satisfies the customers specific requirements. As a result, the Company operates
with minimal finished goods inventory.
The Company works with a number of subcontractors to assemble mechanical
components, to manufacture printed circuit boards, and to produce certain
components, all to the Company's design specifications. A number of these
components are made using tools that have been designed for, and belong to, the
Company, but that are
<PAGE>
located on the manufacturer's premises. The Company has relationships with
subcontractors who provide subassemblies on a turn-key basis. The Company also
purchases components directly from one or more third party suppliers before
forwarding them to subcontractors for assembly. In general, the Company believes
that these services are available from a number of different companies.
The Company employs extensive quality control systems and has a quality
assurance department. The Company received ISO 9001 quality assurance
certification in March 1996.
SALES AND MARKETING / CUSTOMERS
The Company markets its products worldwide through a direct sales force,
independent sales representatives and distributors, OEMs, value-added resellers
and systems integrators. The Company's sales and marketing efforts are based on
the recognition that each of the Company's target vertical markets purchases
from different channels.
The Company's direct sales force focuses its efforts on building and
maintaining relationships with large-volume, repeat purchasers of the Company's
computing platforms and with dominant manufacturers or sales channel entities
within their vertical markets. The Company also utilizes a network of
independent sales representatives for domestic sales. Other segments of the
market are addressed by sales to value-added resellers and systems integrators
that typically sell systems that have been configured for specific end-user
applications through the addition of hardware, software or service. For
international sales, the Company maintains a network of international
distributors, which are managed by the Company's director of international
sales. To date, the Company's international sales have been principally in
Europe.
The Company conducts its sales activities from its worldwide headquarters
in Eden Prairie, Minnesota as well as sales offices in Alabama, California,
Florida, New Jersey, New York, Texas, Virginia and Washington D.C.
The Company had one customer in 1997, Navistar International, which
represented 13% of net sales. During the same period, sales to international
customers represented approximately 25% of net sales. The Company does not
believe that it is dependent upon sales to any single customer given the
Company's history of a relatively large number of different customers and wide
variations in the size and timing of orders from both new and repeat customers.
The top five customers of FieldWorks in 1996 and 1997 were Navistar
International Transportation Corporation, Phototelesis (a division of Raytheon
Corporation), Mobile Data Solutions Inc. (for sale to the City of San Antonio
Public Service), UroMetrics, Inc. and Boards Technologies AG.
BACKLOG
The Company believes that backlog is not a meaningful indicator of future
business prospects due to the potentially long customer sales cycle and
significant variations in the size and delivery schedules of orders received by
the Company. As a result, the Company does not believe that backlog at any
particular date is necessarily indicative of future results.
COMPETITION
The Company believes that it currently occupies a niche in the field force
automation market with its customer-specific computing solutions. The Company
currently faces direct competition in this market niche from companies producing
portable computers intended for field use such as Dolch Computer Systems, Getac
Corporation, XL Computing Corporation (a subsidiary of Cycomm International,
Inc.), Itronix Corporation, Kontron Elektronik Corporation (a subsidiary of
Kontron Elektronik GmbH) and Panasonic Personal Computer Company. To the extent
the Company and its direct competitors expand and develop this market niche,
other manufacturers may turn their attention to this niche and begin to produce
products directly competitive with those offered by the Company. The Company's
computing platforms also face indirect competition from a variety of different
companies and products, including consumer portable personal computers,
customized portable personal computers and single-purpose diagnostic and data
collection instruments.
<PAGE>
Both the computer industry and the diagnostic and data collection
instrument industry are intensely competitive. Many of the companies that
produce or may produce devices that compete, directly or indirectly, with the
Company's products have substantially greater financial, technological and
marketing resources than the Company. Among other effects, increased competition
may require the Company to reduce the prices it charges for its products. There
can be no assurance that the Company will be able to compete effectively against
current or future competitors, or that such competitors will not succeed in
adapting more rapidly and effectively to changes in technology or in the market
or in developing or marketing products that will be more widely accepted.
RESEARCH AND DEVELOPMENT
The Company designs many of the aspects and components of its computing
platforms, including lay-out, housings and circuit boards, rather than
incorporating other manufacturers' products. The Company believes that its past
efforts in this area have provided it with technological advantages and the
Company intends to continue to focus research and development efforts on
improving its core technologies. In addition, the Company is continuing research
and development efforts that are focused on developing additional series of
products, such as the 2000 Series, that will address broader customer
preferences by providing toolboxes with a greater range of expandability, size
and price. Finally, the Company's research and development efforts also involve
developing customized solutions for its customers who have unique, specialized
requirements.
The Company spent approximately $1.9 million (representing 8% of net
sales), $1.9 million (representing 14% of net sales) and $0.9 million
(representing 12% of net sales) on research and development in 1997, 1996 and
1995, respectively.
INTELLECTUAL PROPERTY
In April 1996 the Company filed a provisional patent application related to
certain aspects of the design of its 5000 Series Field WorkStation notebook
computing platforms, including the technology module and features that enhance
its upgradeability and ruggedness. In March 1997, the Company filed a
nonprovisional United States patent application, and filed an international
patent application under the international Patent Cooperation Treaty ("PCT"),
both of which claimed priority to the provisional patent application. In July
1996, the Company filed a nonprovisional United States patent application
related to the backplane design employed in its 7000 Series Field WorkStation
laptop computing platforms. In July 1997, the Company filed a PCT application
which claimed priority to the nonprovisional United States patent application.
The Company uses the following marks in connection with its products:
FieldWorks, FieldWorks with Design, Field MousePad, Field WorkStation, and
Technology Module. Registrations have been issued in the U.S. Patent and
Trademark Office with respect to FieldWorks with Design, Field MousePad, Field
WorkStation and Technology Module. FieldWorks with Design is registered on the
Principal Register. The remaining registrations are registered on the
Supplemental Register. Supplemental Registrations do not confer the same rights
as Principal Registrations. Specifically, Supplemental Registrations do not
serve as prima facie evidence of the validity of the registered mark, the
registration of the mark, the registrant's ownership of the mark, or the
registrant's exclusive right to use the mark. In addition, the filing date of
the application does not confer any right of priority and does not constitute
notice of the registrant's claim of ownership of the mark. The Company is aware
that there are third parties that have claimed and may claim superior rights, in
certain territories in the United States, to the use of certain of the marks in
which the Company claims rights.
EMPLOYEES
As of January 4, 1998, the Company employed 132 full-time employees, of
whom 55 were engaged primarily in manufacturing, 38 were engaged primarily in
sales and marketing, 22 were engaged primarily in engineering and research and
development, and 17 were engaged primarily in administration. The Company also
employs part-time or temporary employees, mostly in manufacturing. None of the
Company's employees are represented by any labor union or other collective
bargaining unit. The Company believes that its relations with its employees are
good.
<PAGE>
The Company maintains $1 million key man life insurance policies on the
lives of each of Gary J. Beeman, the Company's Vice Chairman of the Board, and
Robert C. Szymborski, the Company's Executive Vice President and Chief Technical
Officer, with the proceeds payable to the Company.
ITEM 2. PROPERTIES
The Company signed a lease for a new, larger facility and moved its office
personnel during the fourth quarter of 1997. The production operations moved
into the new facility during the first quarter of 1998. The facility is
approximately 53,000 square feet and is located in Eden Prairie, Minnesota. The
lease term expires in November 2004. The Company's main operations had
previously been conducted at another leased site of approximately 24,000 square
feet in Eden Prairie, Minnesota. This space, the lease for which expires in June
1999, has been subleased for the remaining period.
The Company also leases approximately 2,700 square feet in Springfield,
Virginia, and approximately 200 square feet in Woodland Hills, California. The
office of the Company's director of federal business is located at the
Springfield facility, where the lease term expires in June 2000. The office of
the Company's regional sales manager for the Western Region is located at the
Woodland Hills facility, where the lease term expires on March 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its
business. Although the Company cannot predict the outcome of any such legal
actions, management believes that there is no pending legal proceeding against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the Company's financial position, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
Company's fourth quarter ended January 4, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
Gary J. Beeman 44 Vice Chairman of the Board
Karen L. Engebretson 34 Chief Financial Officer, Vice President of Finance
Ronald E. Lewis 53 President, Chief Executive Officer
Robert C. Szymborski 49 Executive Vice President, Chief Technical Officer
Gary J. Beeman was a co-founder of the Company and has served as its Vice
Chairman of the Board of Directors since March 1998 and as its Treasurer and a
member of the Board of Directors of the Company since the Company's inception in
October 1992. He also served as the Company's Chairman of the Board of Directors
until January 1997, as its President until April 1997 and as its Chief Executive
Officer until March 1998.
Karen L. Engebretson has served as Chief Financial Officer and Vice President of
Finance of the Company since July 1997. From 1994 to May 1997, Ms. Engebretson
was employed by EMPAK, Inc., a plastics manufacturer serving international
semiconductor and memory disk markets, most recently as Chief Financial Officer.
From 1985 to 1994, Ms. Engebretson held various positions with Honeywell, Inc.
and Alliant Techsystems, Inc.
Ronald E. Lewis has served as the Company's President and Chief Operating
Officer since April 1997 and its Chief Executive Officer since March 1998. From
1995 through April 1997, Mr. Lewis was President and Chief Executive Officer of
Pan Am Systems, Inc., a satellite communications company. From 1987 through
1994, Mr. Lewis was President and Chief Executive Officer of Vic Manufacturing
Company, a manufacturer of commercial cleaning and environmental compliance
equipment. Previously, he held various positions, including general management
positions, with Data Card Corporation and the Toro Company.
<PAGE>
Robert C. Szymborski was a co-founder of the Company and has served as Executive
Vice President, Chief Technical Officer and Secretary and a member of the Board
of Directors since the Company's inception in October 1992.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The information required by this Item is incorporated by reference to page
28 of the Company's 1997 Annual Report to Shareholders.
SHAREHOLDERS
As of March 23, 1998, there were 175 holders of record of the Company's
Common Stock.
DIVIDENDS
The Company has never paid dividends and intends to retain earnings for use
in its business. The Company does not anticipate paying any dividends for the
foreseeable future.
USE OF PROCEEDS
The Company's registration statement on Form S-1, file number
333-18335, was declared effective on March 19, 1997. The Company registered an
aggregate of 2,443,750 shares of common stock, $.001 par value (including
316,250 shares covered by a registration statement filed pursuant to Rule 462(m)
on March 20, 1997, file number 333-23637) with R.J. Steichen & Company as the
managing underwriter. The offering commenced on March 20, 1997, and on March 25,
1997, the Company closed on aggregate proceeds of $13,812,500 from the sale of
2,125,000 of these shares. The remainder of the shares registered were subject
to an underwriters' over-allotment option that subsequently expired unexercised.
The following expenses were incurred in connection with the issuance
and distribution of the securities:
Underwriters discount and commission $ 967,000
Expenses paid to underwriters 276,000
Other expenses 809,000
-----------
Total expenses $ 2,052,000
===========
Net offering proceeds $11,760,000
===========
The net offering proceeds have been used as follows as of January 4,
1998:
Construction of plant, building and $ 74,000
facilities
Purchase of machinery and equipment 687,000
Repayment of indebtedness 6,597,000
Working capital 1,183,000
Temporary investment in Norwest
Advantage Cash Investment Account 3,219,000
-----------
$11,760,000
===========
All such amounts were paid direct to third parties.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page
12 of the Company's 1997 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to pages
13 through 16 of the Company's 1997 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages
17 through 28 of the Company's 1997 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is set forth in the Proxy
Statement under the heading Election of Directors and is incorporated herein by
reference. The information regarding executive officers of the Company is
contained in Part I, Item 4 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth in the Proxy Statement under
the heading Executive Compensation and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth in the Proxy Statement under
the heading Security Ownership of Certain Beneficial Owners and Management and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth in the Proxy Statement under
the heading Certain Transactions and is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements: The following Consolidated
Financial Statements of FieldWorks, Incorporated and Report of
Arthur Andersen LLP, Independent Public Accountants, are
incorporated by reference to pages 17 through 28 of the
Registrant's 1997 Annual Report to Shareholders:
Consolidated Balance Sheets--January 4, 1998 and January 5, 1997
Consolidated Statements of Operations--Fiscal Years Ended
January 4, 1998, January 5, 1997 and December 31, 1995
Consolidated Statements of Shareholders' Equity--Three Year Period
Ended January 4, 1998
Consolidated Statements of Cash Flow--Fiscal Years Ended
January 4, 1998, January 5, 1997 and
December 31, 1995
Notes to Consolidated Financial Statements
Report of Arthur Andersen LLP, Independent Public Accountants
2. Financial Statement Schedule: The following financial statement
schedule of FieldWorks, Incorporated for the fiscal years ended
January 4, 1998, January 5, 1997, and December 31, 1995, is filed
as part of this Report and should be read in conjunction with the
Consolidated Financial Statements of FieldWorks, Incorporated.
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are
not applicable or are not required or the information required to
be set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits: The Exhibits listed on the accompanying Index to
Exhibits are filed as part of, or incorporated by reference into,
this Report.
(b)Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the fiscal quarter ended January 4, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FieldWorks, Incorporated
/S/ RONALD E. LEWIS
--------------------------------
Ronald E. Lewis
President,
Chief Executive Officer
Dated: April 3, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant, in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RONALD E. LEWIS President, Chief Executive Officer April 3,1998
--------------------
Ronald E. Lewis
/s/ KAREN L. ENGEBRETSON Chief Financial Officer, April 3, 1998
-------------------- Vice President of Finance
Karen L. Engebretson (principal financial and
accounting officer)
/s/ GARY J. BEEMAN Vice Chairman of the Board April 3, 1998
-------------------- of Directors
Gary J. Beeman
/s/ ROBERT W. HELLER Director April 3, 1998
--------------------
Robert W. Heller
/s/ GEORGE E. KLINE Director April 3, 1998
--------------------
George E. Kline
/s/ DAVID C. MALMBERG Chairman of the Board April 3, 1998
-------------------- of Directors
David C. Malmberg
/s/ ROBERT C. SZYMBORSKI Director April 3, 1998
--------------------
Robert C. Szymborski
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
DEDUCTIONS -
BALANCE AT ADDITIONS WRITE-OFFS OF
FISCAL BEGINNING OF CHARGED TO BAD UNCOLLECTIBLE BALANCE AT END
YEAR YEAR DEBT EXPENSE ACCOUNTS OF YEAR
- ------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1997 Allowance for Doubtful Accounts 201,360 236,500 53,303 384,557
1996 Allowance for Doubtful Accounts 110,568 91,500 708 201,360
1995 Allowance for Doubtful Accounts 27,762 84,060 1,254 101,568
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO DESCRIPTION
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3.1 Second Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to the exhibit 3.1 filed with the Company's
Registration Statement filed on Form S-1, File No. 333-18335)
3.2 Second Amended and Restated Bylaws of the Company (incorporated by
reference to the exhibit 3.4 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
4.1 Form of Certificate for Common Stock (incorporated by reference to the
exhibit 4.1 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.1 Form of Warrant to purchase Shares of Common Stock, including
registration rights provisions (incorporated by reference to the
exhibit 10.1 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.2 Form of Promissory Note (May and June 1996) (incorporated by reference
to the exhibit 10.2 filed with the Company's Registration Statement
filed on Form S-1, File No. 333-18335)
10.3 Warrant, dated as of June 19, 1996, between the Company and Brightstone
Capital, Ltd. (incorporated by reference to the exhibit 10.3 filed with
the Company's Registration Statement filed on Form S-1, File No.
333-18335)
10.4 Form of Bridge Loan Agreement (July 1996) (incorporated by reference to
the exhibit 10.4 filed with the Company's Registration Statement filed
on Form S-1, File No. 333-18335)
10.5 Form of Promissory Note (July 1996) (incorporated by reference to the
exhibit 10.5 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.6 Form of Warrant (July 1996) (incorporated by reference to the exhibit
10.6 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
10.7 Purchase Agreement for Series A Convertible Preferred Stock, dated as
of July 29, 1996, by and between the Company and Network General
Corporation, including registration rights provisions (incorporated by
reference to the exhibit 10.7 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.8 Warrant, dated as of July 29, 1996, issued to Network General
Corporation (incorporated by reference to the exhibit 10.8 filed with
the Company's Registration Statement filed on Form S-1, File No.
333-18335)
10.9 Amendment to Bridge Loan Agreement and Promissory Note, dated as of
August 2, 1996, between the Company and Brightbridge Fund I L.P.
(incorporated by reference to the exhibit 10.9 filed with the Company's
Registration Statement filed on Form S-1, File No. 333-18335)
10.10 Form of Bridge Loan Agreement (September 1996) (incorporated by
reference to the exhibit 10.10 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.11 Form of Promissory Note (September 1996) (incorporated by reference to
the exhibit 10.11 filed with the Company's Registration Statement filed
on Form S-1, File No. 333-18335)
10.12 Form of Warrant (September 1996) (incorporated by reference to the
exhibit 10.12 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.13 Amendment to Warrant, dated October 15, 1996, between the Company and
Brightstone Capital, Ltd. (incorporated by reference to the exhibit
10.13 filed with the Company's Registration Statement filed on Form
S-1, File No. 333-18335)
10.14 Agreement to Extend Promissory Notes and Amendment to Warrants, dated
as of October 15, 1996, between the Company and Brightstone Fund VI,
Brightstone Fund VII and Brightstone Capital, Ltd. (incorporated by
reference to the exhibit 10.14 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
<PAGE>
10.15 Agreement to Extend Promissory Note and Amendment to Warrant, dated as
of October 15, 1996, between the Company and Stephen L. Becher
(incorporated by reference to the exhibit 10.15 filed with the
Company's Registration Statement filed on Form S-1, File No. 333-18335)
10.16 Amendment to Warrant, dated as of October 15, 1996, between the Company
and Brightbridge Fund I L.P. (incorporated by reference to the exhibit
10.16 filed with the Company's Registration Statement filed on Form
S-1, File No. 333-18335)
10.17 Form of Bridge Loan Agreement including registration rights provisions
(December 1996) (incorporated by reference to the exhibit 10.17 filed
with the Company's Registration Statement filed on Form S-1, File No.
333-18335)
10.18 Form of Subordinated Promissory Note (December 1996) (incorporated by
reference to the exhibit 10.18 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.19 Form of Warrant (December 1996) (incorporated by reference to the
exhibit 10.19 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.20 Office/Warehouse Lease, dated May 10, 1994, by and between The
Northwestern Mutual Life Insurance Company and the Company
(incorporated by reference to the exhibit 10.20 filed with the
Company's Registration Statement filed on Form S-1, File No. 333-18335)
10.21 Amendment to Lease, dated as of May 22, 1996, between the Company and
The Northwestern Mutual Life Insurance Company (incorporated by
reference to the exhibit 10.21 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.22 Lease Agreement dated April 7, 1995, by and between Ronald C. Devine
and the Company (incorporated by reference to the exhibit 10.22 filed
with the Company's Registration Statement filed on Form S-1, File No.
333-18335)
10.23 1994 Long Term Incentive and Stock Option Plan, as amended, including
forms of option agreements (incorporated by reference to the exhibit
10.24 filed with the Company's Registration Statement filed on Form
S-1, File No. 333-18335)
10.24 Directors' Stock Option Plan (incorporated by reference to the exhibit
10.25 filed with the Company's Registration Statement filed on Form
S-1, File No. 333-18335)
10.25 Form of Mutual Confidentiality Agreement for use with third parties
(incorporated by reference to the exhibit 10.26 filed with the
Company's Registration Statement filed on Form S-1, File No. 333-18335)
10.26 Form of Employee Disclosure and Assignment Agreement (incorporated by
reference to the exhibit 10.27 filed with the Company's Registration
Statement filed on Form S-1, File No. 333-18335)
10.27 Form of OEM Agreement (incorporated by reference to the exhibit 10.28
filed with the Company's Registration Statement filed on Form S-1, File
No. 333-18335)
10.28 Form of Sales Representative Agreement (incorporated by reference to
the exhibit 10.29 filed with the Company's Registration Statement filed
on Form S-1, File No. 333-18335)
10.29 Form of System Integrator Agreement (incorporated by reference to the
exhibit 10.30 filed with the Company's Registration Statement filed on
Form S-1, File No. 333-18335)
10.30 Form of Extended Limited Warranty Agreement (incorporated by reference
to the exhibit 10.31 filed with the Company's Registration Statement
filed on Form S-1, File No. 333-18335)
10.31 Lease Agreement, dated November 11, 1996, by and between OMNI
Offices/Woodlawn Hills and the Company (incorporated by reference to
the exhibit 10.32 filed with the Company's Registration Statement filed
on Form S-1, File No. 333-18335)
10.32 Option Agreement, dated as of January 21, 1997, by and between the
Company and David C. Malmberg (incorporated by reference to the exhibit
10.33 filed with the Company's Registration Statement filed on Form
S-1, File No. 333-18335)
10.33 Warrant dated March 25, 1997, issued to R.J. Steichen & Company
(incorporated by reference to the exhibit 10.1 filed with the Company's
Report on Form 10-Q for the fiscal quarter ended April 6, 1997)
<PAGE>
10.34 Employment Agreement with Ronald E. Lewis dated September 18, 1997
(incorporated by reference to the exhibit 10.1 filed with the Company's
Report on Form 10-Q for the fiscal quarter ended October 5, 1997)
10.35 Lease Agreement, dated May 16, 1997, by and between CSM Properties,
Inc. and the Company 10.36 Addendum to Lease, dated as of December 30,
1997, between the Company and CSM Properties, Inc.
10.37 Sublease Agreement, dated November 6, 1997, by and between Golf Galaxy
and the Company 10.38 Sublease Agreement, dated December 5, 1997, by
and between LSC, Inc. and the Company 10.39 Sublease Agreement, dated
January 6, 1998, by and between Apartment Search and the Company
11.1 Statement Re Computation of Per Share Earnings
13.1 Portions of the Annual Report to Shareholders for the fiscal year ended
January 4, 1998 expressly incorporated by reference herein
21.1 Subsidiaries of the Company (incorporated by reference to the exhibit
21.1 filed with the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule for the year ended January 4, 1998
27.2 Restated Financial Data Schedule for the nine month period ended
October 5,1997
27.3 Restated Financial Data Schedule for the six month period ended July 6,
1997
27.4 Restated Financial Data Schedule for the three month period ended April
6, 1997
27.5 Restated Financial Data Schedule for the year ended January 5, 1997
27.6 Restated Financial Data Schedule for the year ended December 31, 1995
and nine month period ended September 30, 1996
99.1 Cautionary Statement
<PAGE>
EXHIBIT 10.35
L E A S E
ARTICLE 1. LEASE TERMS
1.1 LANDLORD AND TENANT. This lease ("Lease") is entered into this 16TH DAY OF
MAY, 1997 by and between CSM PROPERTIES, INC., a Minnesota corporation,
("Landlord") and FIELDWORKS, INC. a Minnesota corporation, ("Tenant").
1.2 PREMISES. Landlord hereby rents, leases, lets and demises to Tenant the
following described property as illustrated on the site plan attached hereto as
EXHIBIT A: approximately 53,006 SQUARE FEET OF OFFICE, ASSEMBLY/ENGINEERING, AND
WAREHOUSE SPACE, TOGETHER WITH THE NON-EXCLUSIVE RIGHT OF TENANT, ITS AGENTS,
EMPLOYEES, CUSTOMERS, CONTRACTORS, INVITEES AND VISITORS, TO USE THE PARKING
AREAS, WALKWAYS, ROADS, DRIVEWAYS, RESTROOMS, HALLWAYS, CORRIDORS AND ALL OTHER
PORTIONS OF THE PROPERTY THAT ARE NOT LEASED OR HELD FOR LEASE, ("PREMISES") IN
BUILDING B OF THE EDENVALE CROSSING BUSINESS CENTER located at ANAGRAM DRIVE AND
VALLEY VIEW ROAD IN EDEN PRAIRIE, MINNESOTA, and consisting of approximately
84,922 square feet ("Building"). A floor plan of the Premises and a description
of improvements, if any, to be constructed are attached hereto as EXHIBITS B AND
C.
On or before the Commencement Date, the number of square feet of rentable area
in the leased Premises and in the Building shall be determined and certified to
Tenant by the architectural firm that designed the Building. Such certification
shall include, but not be limited to, a certification that the rentable area in
the leased Premises and in the Building were determined by measuring from the
exterior faces of exterior walls and the mid point of common or demising walls.
The costs of such certification shall be paid by Landlord. Following such
certification, the Base Rent and Tenant's Pro Rata Share shall be adjusted to
reflect the rentable areas of the Premises and Building determined and
established by such certification, and the parties shall execute an addendum to
this Lease, in the form of attached EXHIBIT D, which will establish and confirm
the rentable areas of the Premises and Building, Base Rent and Tenant's Pro Rata
Share.
1.3 LEASE TERM. The term of this Lease shall commence on OCTOBER 1, 1997
("Commencement Date") and shall terminate EIGHTY-FOUR (84) MONTHS thereafter on
SEPTEMBER 30 2004, unless sooner terminated as hereinafter provided. Tenant
shall have access to the Premises two (2) weeks prior to October 1, 1997 to
allow Tenant to install its fixtures, data and telephone systems, with the
understanding that Tenant's installers will be working simultaneously with
Landlord's contractors. In the event that Tenant does not vacate the Premises
upon the expiration or termination of this Lease, Tenant shall be a tenant at
will for the holdover period and all of the terms and provisions of this Lease
shall be applicable during that period, except that Tenant shall pay Landlord as
base rental for the period of such holdover an amount equal to one hundred
twenty-five percent (125%) of the base rent which would have been payable by
Tenant had the holdover period been a part of the original term of this Lease,
together with all additional rent as provided in this Lease. Tenant agrees to
vacate and deliver the Premises to Landlord upon Tenant's receipt of notice from
Landlord to vacate. The rental payable during the holdover period shall be
payable to Landlord on demand. No holding over by Tenant, whether with or
without the consent of Landlord, shall operate to extend the term of this Lease.
1.4 BASE RENT. Base Rent is:
MONTHS MONTHLY BASE RENT PER SQ. FT.
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INITIAL TERM: 1-48 $38,429.35 $8.70
49-84 $40,372.90 $9.14
OPTION TERM: 85-120 market market
121-156 market market
1.5 PERMITTED USE: OFFICE, ASSEMBLY/ENGINEERING AND WAREHOUSING, INCLUDING,
BUT NOT LIMITED TO, TESTING AND MINOR REPAIR OF ELECTRONIC
COMPONENTS AND CIRCUITRY.
1.6 SECURITY DEPOSIT: NONE ($0.00)
1.7 PRO RATA SHARE: SIXTY-TWO AND 42/100 PERCENT (62.42%),
subject to adjustment as provided in Section 2.2 hereof.
1.8 ADDRESSES.
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<PAGE>
LANDLORD'S ADDRESS: TENANT'S ADDRESS:
CSM PROPERTIES, INC. FIELDWORKS, INC.
2575 UNIVERSITY AVE. W., SUITE 150 (THE ADDRESS OF THE PREMISES
ST. PAUL, MN 55114-1024 ONCE ESTABLISHED)
(612) 646-1717
ARTICLE 2. RENT AND OPERATING EXPENSES
2.1 BASE RENT. Tenant agrees to pay monthly as base rent during the term of this
Lease the sum of money set forth in Section 1.4 of this Lease, which amount
shall be payable to Landlord at the address shown above. One monthly installment
shall be due and payable on or before the first day of each calendar month
succeeding the Commencement Date during the term of this Lease; provided, if the
Commencement Date should be a date other than the first day of a calendar month,
the monthly rental set forth above shall be prorated to the end of that calendar
month, and all succeeding installments of rent shall be payable on or before the
first day of each succeeding calendar month during the term of this Lease.
Tenant shall pay, as additional rent, all other sums due under this Lease.
Notwithstanding anything in this Lease to the contrary, if Landlord, for any
reason whatsoever (other than Tenant's default), cannot deliver possession of
the Premises to the Tenant on the Commencement Date, Landlord shall not be
liable for any loss or damage resulting therefrom, nor shall the expiration of
the term be extended, but all rent shall be abated until Landlord delivers
possession. If Landlord fails, for any reason other than force majeure or Tenant
caused delays, to deliver possession to Tenant within thirty (30) days after the
Commencement Date, Tenant may terminate this Lease by written notice to
Landlord, which notice, to be effective, must be given prior to delivery of
possession of the Premises to Tenant.
2.2 OPERATING EXPENSES. Tenant shall also pay as additional rent Tenant's pro
rata share of the Operating Expenses of Landlord for the Building. Landlord may
invoice Tenant monthly for Tenant's pro rata share of the estimated Operating
Expenses for each calendar year, which amount shall be adjusted from
time-to-time by Landlord based upon anticipated Operating Expenses. Within one
hundred twenty (120) days following the close of each calendar year, Landlord
shall provide Tenant an accounting showing in reasonable detail the computations
of additional rent due under this Section. In the event the accounting shows
that the total of the monthly payments made by Tenant exceeds the amount of
additional rent due by Tenant under this Section, the accounting shall be
accompanied by evidence of a credit to Tenant's account. In any event the
accounting shows that the total of the monthly payments made by Tenant is less
than the amount of additional rent due by Tenant under this Section, the
accounting shall be accompanied by an invoice for the additional rent.
Notwithstanding any other provisions in this Lease, during the year in which
this Lease terminates, Landlord, prior to the termination date, shall have the
option to invoice Tenant for Tenant's pro rata share of the Operating Expenses
based upon the previous year's Operating Expenses. If this Lease shall terminate
on a day other than the last day of a calendar year, the amount of any
additional rent payable by Tenant applicable to the year in which the
termination shall occur shall be prorated on the ratio that the number of days
from the commencement of the calendar year to and including such termination
date bears to 365. Tenant agrees to pay any additional rent due under this
Section within ten (10) days following receipt of the invoice or accounting
showing additional rent due. Tenant's pro rata share set forth in Section 1.7
shall, subject to reasonable adjustment by Landlord, be equal to a percentage
based upon a fraction, the numerator of which is the total area of the Premises
as set forth in Article 1 and the denominator of which shall be the net rentable
area of the Building.
2.3 DEFINITION OF OPERATING EXPENSES. The term "Operating Expenses" includes all
expenses incurred by Landlord with respect to the maintenance and operation of
the Building, including, but not limited to, the following: maintenance, repair
and replacement costs, except to the extent the costs thereof are reimbursed to
Landlord by insurance; electricity, fuel, water, sewer, gas and other common
Building utility charges, except any such utilities provided to the Premises
which are separately metered; equipment used for maintenance and operation of
the Building; operational expenses; exterior window washing and janitorial
services; trash and snow removal; landscaping and pest control; management fees,
wages and benefits payable to employees of Landlord whose duties are directly
connected with the operation and maintenance of the Building; all services,
supplies, repairs, replacements or other expenses for maintaining and operating
the Building or project including parking and common areas; improvements made to
the Building which are required under any governmental law or regulation that
was not applicable to the Building at the time it was constructed; installation
of any device or other equipment which improves the operating efficiency of any
system within the Premises and thereby reduces Operating Expenses; all other
expenses which would generally be regarded as operating, repair, replacement and
maintenance expenses; all real property taxes and installments of special
assessments which accrue against the Building during the term of this Lease and
legal fees incurred in connection with actions to reduce the same; and all
insurance premiums Landlord is required to pay or deems necessary to pay,
including fire and extended coverage, and rent loss and public liability
insurance, with respect to the Building. Landlord estimates taxes and Operating
Expenses as follows: $1.00 per square foot for 1997, $2.50 per square foot for
1998, and $3.25 per square foot for 1999.
2.4 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance premiums
paid by Landlord for the Building is caused by Tenant's use of the Premises or
if Tenant vacates the
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<PAGE>
Premises and causes an increase in such premiums, then Tenant shall pay as
additional rent the amount of such increase to Landlord.
2.5 TENANT'S RIGHT TO AUDIT. Tenant shall have the right to audit Operating
Expenses and Landlord shall reimburse Tenant for its actual and reasonable
out-of-pocket costs of conducting such audit, if it is determined, pursuant to
such audit, that Landlord has overstated the actual amount of Tenant's share of
Operating Expenses for the applicable year by an excess of at least five percent
(5%). Any audit should be conducted upon at least ten (10) days' prior written
notice, at a location in the Twin Cities designated by Landlord, during normal
business hours, by Tenant or a regionally or nationally recognized firm of
certified public accountants engaged by Tenant at their standard hourly rates.
If it is determined, pursuant to such audit, that there has been an overpayment
or underpayment of Tenant's share of Operating Expenses, the parties shall
promptly make such reconciliation payments and/or refunds as are appropriate.
Upon any final determination that there has been an overpayment of Tenant's
share of Operating Expenses, and Landlord shall fail to promptly (i.e. within
fifteen (15) days) reimburse Tenant as required above, Tenant shall have the
right to offset the amount of such overpayment against the next installment(s)
of Base Rent due hereunder.
ARTICLE 3. OCCUPANCY AND USE
3.1 USE. Tenant warrants and represents to Landlord that the Premises shall be
used and occupied only for the purpose as set forth in Section 1.5. Landlord
acknowledges that Landlord has reviewed Tenant's intended use of the Premises
and hereby approves of such use. Tenant shall occupy the Premises, conduct its
business and control its agents, employees, invitees and visitors in such a
manner as is lawful, reputable and will not create a nuisance. Tenant shall not
permit any operation which emits any odor or matter which intrudes into other
portions of the Building or otherwise interferes with, annoy or disturb any
other lessee in its normal business operations or Landlord in its management of
the Building. Tenant shall not permit any waste on the Premises to be used in
any way which would, in the opinion of Landlord, be extra hazardous on account
of fire or which would, in any way, increase or render void the fire insurance
on the Building.
3.2 SIGNS. No sign of any type or description shall be erected, placed or
painted in or about the Premises or Building which are visible from the exterior
of the Premises, except those signs submitted to Landlord in writing, and which
signs are in conformance with Landlord's sign criteria attached hereto as
EXHIBIT E. Subject to Landlord's prior approval, not to be unreasonably
withheld, and in compliance with applicable law, Tenant shall have the right to
erect three (3) flag poles in the common area adjacent to the Premises, and to
display business related flags or banners therefrom, and may install directional
signage for Tenant's semi-annual shareholder meetings.
3.3 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Tenant, at Tenant's sole cost
and expense, shall comply with all laws, ordinances, orders, rules and
regulations of state, federal, municipal or other agencies or bodies having
jurisdiction over the use, condition or occupancy of the Premises. Tenant will
comply with the reasonable rules and regulations of the Building adopted by
Landlord. Landlord shall have the right at all times to change and amend the
rules and regulations in any reasonable manner as may be deemed advisable for
the safety, care, cleanliness, preservation of good order and operation or use
of the Building or the Premises, so long as such changes or amendments do not
materially and adversely affect Tenant's use of the Premises. All rules and
regulations of the Building will be sent by Landlord to Tenant in writing and
shall thereafter be carried out and observed by Tenant.
3.4 WARRANTY OF POSSESSION. Landlord warrants that it has the right and
authority to execute this Lease, and Tenant, upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in this
Lease, shall have possession of the Premises during the full term of this Lease
as well as any extension or renewal thereof. Landlord shall not be responsible
for the acts or omissions of any third party that may interfere with Tenant's
use and enjoyment of the Premises, however, Landlord will exercise good faith
efforts to prevent such interference.
3.5 RIGHT OF ACCESS. Landlord or its authorized agents shall at any and all
reasonable times, after 24 hours advance notice and execution by all parties of
a confidentiality agreement requesting access, unless access is required due to
an emergency, have the right to enter the Premises to inspect the same, to show
the Premises to prospective purchasers, lessees, mortgagees, insurers or other
interested parties, and to alter, improve or repair the Premises or any other
portion of the Building. Tenant hereby waives any claim for damages for injury
or inconvenience to or interference with Tenant's business, any loss of
occupancy or use of the Premises, and any other loss occasioned thereby, except
loss incurred as a result of the theft or misappropriation by Landlord, its
employees, contractors or agents, of Tenant's intellectual property occurring as
a result of such entry. Landlord shall have the right to use any and all means
which Landlord may deem proper to open any door in an emergency without
liability therefor. Tenant shall permit Landlord to erect, use, maintain and
repair pipes, cables, conduits, plumbing, vents and wires in, to and through the
Premises as often and to the extent that Landlord may now or hereafter deem to
be necessary or appropriate for the proper use, operation
-3-
<PAGE>
and maintenance of the Building.
ARTICLE 4. UTILITIES AND ACTS OF OTHERS
4.1 BUILDING SERVICES. Tenant shall pay when due, all charges for utilities
furnished to or for the use or benefit of Tenant or the Premises. Tenant shall
have no claim for rebate of rent on account of any interruption in service,
unless service is interrupted as a result of Landlord's negligent or willful and
wanton actions or omissions. Landlord shall cause gas and electrical services to
the Premises to be separately metered.
4.2 THEFT OR BURGLARY. Landlord shall not be liable to Tenant for losses to
Tenant's property or personal injury caused by criminal acts or entry by
unauthorized persons into the Premises or the Building.
ARTICLE 5. REPAIRS AND MAINTENANCE
5.1. LANDLORD REPAIRS. Landlord shall not be required to make any improvements,
replacements or repairs of any kind or character to the Premises or the Building
during the term of this Lease except as are set forth in this Section. Landlord
shall keep and maintain the common areas and improvements located therein in
good order, condition and repair, including, without limitation, lawn
maintenance and snow, ice and debris removal consistent with industry standards
for buildings comparable to the Building. Landlord shall maintain only the roof,
foundation, floor slab, parking and common areas, the structural soundness of
the exterior walls, doors, corridors, and other structures serving the Premises,
provided, that Landlord's cost of maintaining, replacing and repairing the items
set forth in this Section are Operating Expenses subject to the additional rent
provisions in Section 2.2 and 2.3. Landlord shall not be liable to Tenant,
except as expressly provided in this Lease, for any damage or inconvenience, and
Tenant shall not be entitled to any abatement or reduction of rent by reason of
any repairs, alterations or additions made by Landlord under this Lease, unless
the repairs are caused by the negligent or willful and wanton actions or
omissions of Landlord and prevent Tenant from using the Premises for more than
three (3) consecutive days. Landlord acknowledges and agrees that the
replacement of the HVAC unit compressors and/or heat exchangers exclusively
serving the Premises shall be at Landlord's expense, if such items cannot be
repaired. If such compressors and/or heat exchangers can be repaired, the full
cost of repair will be invoiced to and paid by Tenant, unless it occurs in the
first year of the lease term or is covered by a manufacturer's warranty. This
agreement by Landlord is also contingent on Tenant providing proof of carrying a
preventative maintenance program for the HVAC system.
5.2 LANDLORD COMPLIANCE WITH LAWS. Landlord shall comply with, or cause to be
complied with, all insurance requirements and all laws, statutes, ordinances and
regulations of federal, sate, county and municipal authorities (collectively
"Laws") which shall impose any duty upon Landlord or Tenant with respect to the
physical condition of the Building (but not with respect to the conduct of
Tenant's business therein or as a result of Tenant's occupancy thereof). The
costs incurred by Landlord in connection with the foregoing shall be recovered
by Landlord as Operating Expenses pursuant to Sections 2.2 and 2.3 of this
Lease.
5.3 TENANT REPAIRS. Tenant shall, at all times throughout the term of this
Lease, including renewals and extensions, and at its sole expense, keep and
maintain the Premises in a clean, safe and sanitary condition in compliance with
all applicable laws, codes, ordinances, rules and regulations, except as may
otherwise be provided in Sections 5.1 and 5.2 hereof. Tenant's obligations
hereunder shall include, but not be limited to, the maintenance, repair and
replacement, if necessary, of all heating, ventilation, air conditioning,
lighting and plumbing fixtures and equipment, fixtures, motors and machinery,
all interior walls, partitions, doors and windows, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term "repairs" shall include replacements or renewals when
necessary, and all such repairs made by the Tenant shall be equal in quality and
class to the original work. The Tenant shall keep and maintain all portions of
the Premises in a clean and orderly condition, free of accumulation of dirt and
rubbish. Tenant acknowledges that Tenant may, but shall not be obligated to,
from time to time, remove ice and/or snow from the entry areas serving the
Premises, to supplement the snow and ice removal to be provided by Landlord
pursuant to Section 5.1. If Tenant fails, refuses or neglects to maintain or
repair the Premises as required in this Lease after notice shall have been given
Tenant, in accordance with this Lease, Landlord may make such repairs without
liability to Tenant for any loss or damage that may accrue to Tenant's
merchandise, fixtures or other property or to Tenant's business by reason
thereof, and upon completion thereof, Tenant shall pay to Landlord all costs
plus ten percent (10%) for overhead incurred by Landlord in making such repairs
upon presentation to Tenant of bill therefor. Landlord warrants the condition of
the HVAC equipment during the first year of the lease term.
5.4 TENANT DAMAGES. Tenant shall not allow any damage to be committed on any
portion of the Premises or Building or common areas, and at the termination of
this Lease, by lapse of time or otherwise, Tenant shall deliver the Premises to
Landlord in as good condition as existed at the Commencement Date of this Lease,
ordinary wear and tear excepted. The cost and expense of repairs necessary to
restore the condition of the Premises shall be borne by Tenant.
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<PAGE>
ARTICLE 6. ALTERATIONS AND IMPROVEMENTS
6.1 LANDLORD IMPROVEMENTS. Landlord shall, at its sole cost and expense,
construct the Premises according to and to the extent provided in the plans and
specifications attached hereto as EXHIBITS B AND C and designated as "Landlord's
Work". Landlord's Work shall be completed in a good and workmanlike manner using
new materials of good quality and in compliance with Applicable Laws. Landlord
hereby guarantees all improvements for a period of one (1) year. General outline
building plans for the Building conforming to or consistent with the plans and
specifications for Landlord's Work, and including outline floor plans, and
outline structural, mechanical and electrical plans, shall be submitted to
Tenant for its review within ten (10) business days of the final signing of this
Lease by Landlord and Tenant. Tenant shall have ten (10) business days from the
receipt thereof to review such outline plans and specifications. Failure to make
written objections thereto within said ten (10) day period shall be deemed to
constitute Tenant's approval thereof. If any such objections are made by Tenant
within said period, Landlord and Tenant will attempt, in good faith, to make
such changes therein to accommodate Tenant's needs. Final detailed construction
plans and specifications of Landlord's Work for the Building shall be submitted
to Tenant for Tenant's approval within twenty (20) business days after the final
signing of this Lease by Landlord and Tenant. The detailed plans and
specifications of Landlord's Work for the Building shall conform with said
general outline plans and specifications reviewed and approved by Tenant and
with the specifications attached hereto. Any material changes or modifications
in such plans or specifications shall require Tenant's review and approval. In
the event of such material changes or modifications, Tenant shall have ten (10)
business days from the receipt of such changes and modifications to review and
comment on the same. Failure to comment within said period, in writing, shall be
deemed to constitute Tenant's approval thereof. Tenant agrees that it will not
withhold its approval, except for just and reasonable cause, and will not act in
an arbitrary or capricious manner with respect to the approval of said final
plans and specifications. When said final plans and specifications have been
approved by Landlord and Tenant by affixing thereon the signature of an
authorized officer or employee of each of the respective parties, a description
of said final plans and specifications shall be attached to each party's copy of
this Lease, in place of and in lieu of the specifications attached to this Lease
at the time of its execution and Landlord shall construct and complete the
Building in accordance with said final plans and specifications and applicable
laws. Any changes or modifications to the approved plans and specifications
shall be made and accepted by written change orders or agreement signed by
Landlord and Tenant and shall constitute an amendment to this Lease. In the
event Landlord and Tenant are unable to agree upon and approve said final plans
and specifications on or before the date which is forty (40) business days after
the date of this Lease, either Landlord or Tenant shall have the right to
terminate this Lease by giving written notice of such termination to the other
party hereto. Tenant shall have the privilege of entering the Building
approximately thirty (30) days prior to the substantial completion thereof
(except that Tenant may enter the Building prior to that time, with the prior
consent of Landlord, for the purpose of planning only) for the purpose of
installing fixtures and other equipment, provided that such entry or work does
not unreasonably interfere with the completion of the work to be done by
Landlord. Landlord agrees to give Tenant notice of the anticipated date of
substantial completion of the Building approximately one (1) month prior to such
substantial completion.
In the event Tenant requests, in writing, a change in any of the final approved
plans and specifications, Tenant agrees to pay Landlord upon completion of such
work, the costs, if any, incurred by Landlord as a result of implementing such
change request. Any request which would result in any material delay or material
increase in cost shall be subject to Landlord's approval, which approval may
specifically be conditioned upon additional compensation for delay, the
extension of the commencement date of the term and/or the payment in cash for
such added costs. Landlord shall determine (or provide its best estimate of) the
cost of such change order prior to implementing such change. Any such change
order which results in a material increase in costs shall be acknowledged by
Tenant in writing and if the costs have been determined, then the increase shall
be agreed upon in writing. If Landlord has estimated the cost of such change and
such change will exceed Landlord's estimate, Landlord will obtain Tenant's prior
authorization before proceeding further with such change. An itemization, with
reasonable detail, of any change order resulting in an increase in costs of
$100.00 or more, shall be supplied to Tenant, which itemization shall include
the general contractor's administrative costs, overhead and profit (not to
exceed five percent (5%) of the total change order cost) as a separate line
item. Said costs shall be increased to include construction interest incurred on
such costs and/or incurred as a result of any delay to commencement of the term.
Tenant shall also be responsible for the costs, if any, charged to Landlord by
third parties in processing any such request, which shall include, but shall not
be limited to, outside consultant fees, design professional fees and Landlord's
construction manager's overhead and profit (which shall be five percent (5%) of
the total change order cost).
Landlord's Work as shown on the final plans shall be deemed "substantially
completed" for all purposes under this Lease when: i) they are accessible and in
a condition which would enable them to be fully usable by Tenant for its normal
business operations, and ii) Landlord delivers to Tenant the city certificate of
occupancy or other evidence of Tenant's right to occupy and use the Premises,
including, without limitation, a temporary certificate of occupancy. By
occupying the Premises as a tenant, Tenant shall have conclusively deemed to
have accepted the same and to have acknowledged that said Premises are in the
condition required by this Lease, except for
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latent defects and those punch list matters which Tenant shall have notified
Landlord of, in writing, within forty-five (45) days of such occupancy. Landlord
agrees to cause to be completed or corrected as soon as reasonably possible all
such latent defects and punch list matters, if within the scope of the final
plans. Notwithstanding the foregoing, if Landlord's Work as shown on the final
plans has been substantially completed, except for exterior matters which cannot
be completed due to weather conditions and interior punch list items, then said
Landlord's Work shall nonetheless be deemed substantially completed for purposes
of this Lease, provided occupancy evidence has been delivered , and in such
case, Landlord shall complete such uncompleted exterior matters as soon as
reasonably possible once weather conditions so permit.
Landlord warrants to Tenant that Landlord's Work shall be constructed: i) in
accordance with the final plans, ii) in a workmanlike and skillful manner, iii)
free from all faults and defects in workmanship, material, design and title, and
iv) in compliance with all applicable laws, ordinances and regulations of
governmental authorities having jurisdiction over the Premises. Landlord's
obligations pursuant to this Article shall be limited to causing Landlord's
Work, at its sole cost and expense, to conform to the foregoing representations
and warranties; provided, however, that Tenant shall have first given timely
written notice of such noncompliance to Landlord, and in any event, such notice
shall be on or before ten (10) days prior to the first anniversary date of the
issuance of the city certificate of occupancy. Landlord makes no other
warranties or representations, either express or implied, nor any warranties of
habitability or for a particular purpose, with respect to the Premises, it being
understood that Tenant has approved the plans prior to construction of
Landlord's Work. Landlord shall assign to Tenant all manufacturer's warranties
and other warranties, if any, which it receives from third parties in connection
with Landlord's Work at such time during the lease term, if necessary, for
Tenant's maintenance obligations under Article 5 or other obligations under this
Lease. However, Landlord shall continue to have the license and right to enforce
such warranties, if necessary, in connection with the representations or
warranties by Landlord to Tenant under this Section or Landlord's maintenance
obligations under Article 5.
6.2 TENANT IMPROVEMENTS. Tenant shall not make or allow to be made any
alterations or physical additions in or to the Premises without first obtaining
the written consent of Landlord, which consent shall not be unreasonably
withheld or delayed, but may be conditioned upon Tenant's agreement to remove
such alteration or addition at the expiration or earlier termination of the
lease term. Any alterations, physical additions or improvements to the Premises
made and abandoned at the end of the lease term by Tenant shall become the
property of Landlord upon the termination of this Lease; provided, however,
Tenant may remove any physical additions and/or repair any alterations in order
to restore the Premises to the conditions existing at the time Tenant took
possession, all costs of removal and/or alterations to be borne by Tenant. This
clause shall also apply to moveable equipment or furniture owned by Tenant,
which may be removed by Tenant at the end of the term of this Lease if Tenant is
not then in default and if such equipment and furniture are not subject to any
other rights, liens and interests of Landlord.
ARTICLE 7. CASUALTY AND INSURANCE
7.1 SUBSTANTIAL DESTRUCTION. If all or a substantial portion of the Premises or
the Building should be totally destroyed by fire or other casualty, or if the
Premises or the Building should be damaged so that rebuilding cannot reasonably
be completed within one hundred eighty (180) working days after the date of
written notification by Tenant to Landlord of the destruction, or if insurance
proceeds are not made available to Landlord, or are inadequate, for restoration,
this Lease shall terminate at the option of Landlord or Tenant by written notice
to the other within thirty (30) days following the occurrence, and the rent
shall be abated for the unexpired portion of the Lease effective as of the date
of the written notification. In the event Landlord exercises its right of
termination, as aforesaid, and at the time of such notice the remaining lease
term (including any exercised option term) is two (2) years or more, such
termination shall be of no force and effect if Tenant, within fifteen (15) days
following receipt of Landlord's notice of termination, provides written notice
to Landlord of Tenant's election to require Landlord to proceed with restoration
of the Building and Premises, in which event, Landlord shall proceed with due
diligence to restore the Building and Premises to substantially the same
condition as existed prior to damage, the Lease shall remain in full force and
effect, and the rent payable under the Lease shall be equitably adjusted during
the period for which the Premises are untenantable.
7.2 PARTIAL DESTRUCTION. If the Premises should be partially damaged by fire or
other casualty, and rebuilding or repairs can reasonably be completed within one
hundred eighty (180) working days from the date of written notification by
Tenant to Landlord of the destruction, and insurance proceeds are adequate and
available to Landlord for restoration, this Lease shall not terminate, and
Landlord shall at its sole risk and expense proceed with reasonable diligence to
rebuild or repair the Building or other improvements to substantially the same
condition in which they existed prior to the damage. If the Premises are to be
rebuilt or repaired and are untenantable in whole or in part following the
damage, and the damage or destruction was not caused or contributed to by act or
negligence of Tenant, its agents, employees, invitees or those for whom Tenant
is responsible, the rent payable under this Lease during the period for which
the Premises are untenantable shall be adjusted to such an extent as may be fair
and reasonable under the circumstances. If Landlord gives Tenant written notice
that restoration will take longer than one hundred eighty (180) days (which
notice must be given no later than thirty (30) days after Tenant's notice to
Landlord of the destruction) or in the event that Landlord fails to complete
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the necessary repairs or rebuilding within one hundred eighty (180) working days
from the date of written notification by Tenant to Landlord of the destruction,
Tenant may at its option terminate this Lease by delivering written notice of
termination to Landlord, whereupon all rights and obligations under this Lease
shall cease to exist.
7.3 LANDLORD DEFAULT. In the event Landlord shall fail to proceed with
restoration of the Building and Premises as required herein, and such default
continues for a period of fifteen (15) days following written notice of default
from Tenant to Landlord, then Tenant may proceed with restoration and repair of
the Building and Premises, to the extent necessary to permit Tenant to use and
occupy the Premises, as contemplated by this Lease, and if Landlord shall fail
to reimburse Tenant for the reasonable and necessary costs incurred by Tenant in
connection with such restoration and repair, Tenant may offset such reasonable
and necessary expenses against rent coming due under this Lease, and to the
extent necessary, the term of this Lease shall be extended to permit Tenant to
fully recover such costs.
7.4 PROPERTY INSURANCE. Landlord shall not be obligated in any way or manner to
insure any personal property (including, but not limited to, any furniture,
machinery, goods or supplies) of Tenant upon or within the Premises, any
fixtures installed or paid for by Tenant upon or within the Premises, or any
improvements which Tenant may construct on the Premises. Tenant shall maintain
property insurance on its personal property and shall also maintain plate glass
insurance. Subject to the rights of Landlord's lender to apply insurance
proceeds, in its sole discretion, to restoration of the Building and Premises,
or to payment of the mortgage loan, Tenant shall have a right in or claim to the
proceeds of any policy of insurance maintained by Landlord if and to the extent
Tenant undertakes restoration of the Premises pursuant to Section 7.4 above and
Landlord fails to reimburse Tenant for the costs incurred by Tenant in
connection therewith.
7.5 WAIVER OF SUBROGATION. Anything in this Lease to the contrary withstanding,
Landlord and Tenant hereby waive and release each other of and from any and all
right of recovery, claim, action or cause of action, against each other, their
agents, officers and employees, for any loss or damage that may occur to the
Premises, the improvements of the Building or personal property within the
Building, by reason of fire or the elements, regardless of cause or origin,
including negligence of Landlord or Tenant and their agents, officers and
employees. Landlord and Tenant agree immediately to give their respective
insurance companies which have issued policies of insurance covering all risk of
direct physical loss, written notice of the terms of the mutual waivers
contained in this Section.
7.6 HOLD HARMLESS. Landlord shall not be liable to the Tenant or its employees,
agents, invitees, licensees or visitors, or to any other person, for an injury
to person or damage to property on or about the Premises caused by any act or
omission of Tenant, its agents, servants or employees, or of any other person
entering upon the Premises under express or implied invitation by the Tenant, or
caused by the improvements located on the Premises becoming out of repair, the
failure or cessation of any service provided by Landlord (including security
service and devices), or caused by leakage of gas, oil, water or steam or by
electricity emanating from the Premises. Tenant agrees to indemnify and hold
harmless Landlord of and from any loss, attorney's fees, expenses or claims
arising out of any such damage or injury.
Tenant shall not be liable to Landlord or its employees, agents, invitees,
licensees or visitors, or to any other person, for an injury to person or damage
to property in the Building or common areas serving the Building caused by any
act or omission of Landlord, its agents, servants or employees, including
without limitation, Landlord's failure to remove ice and snow from the common
areas as required in Section 5.1 of this Lease. Landlord agrees to indemnify and
hold harmless Tenant of and from any loss, attorneys' fees, expenses or claims
arising out of any such damage or injury.
7.7 PUBLIC LIABILITY INSURANCE. Tenant shall, during the term hereof, keep in
full force and effect, at its expense, a policy or policies of public liability
insurance with respect to the Premises and the business of Tenant, on terms and
with companies approved in writing by Landlord, in which both Tenant and
Landlord shall be covered by being named as insured parties under reasonable
limits of liability not less than $1,000,000, or such greater coverage as
Landlord may reasonably require, combined single limit coverage for injury or
death. Such policy or policies shall provide that thirty (30) days' written
notice must be given to Landlord prior to cancellation thereof. Tenant shall
furnish evidence satisfactory to Landlord at the time this Lease is executed
that such coverage is in full force and effect.
7.8 LANDLORD'S INSURANCE. Landlord shall maintain in full force and effect
during the lease term: (i) "all risk" commercial property insurance coverage in
the amount of the full replacement value of the Building, as the value may exist
from time to time; (ii) worker's compensation and employer's liability for all
of Landlord's employees; and (iii) earthquake and/or flood insurance if the land
is in an area where such hazards are a known risk and such insurance is
reasonably available and subject to reasonably customary deductibles and
sublimits. Landlord's insurance shall be issued by insurance companies qualified
to do business in Minnesota, with a general policyholder rating of at least
A/VII or A+/V as noted in the most current Best's Insurance Report. Prior to the
Commencement Date and throughout the lease term, Landlord shall provide Tenant
with a certificate(s) of insurance evidencing the amounts and types of coverage
described above with a thirty (30) day notice of cancellation. In addition,
Landlord will cause its contractors to maintain in full force and effect
commercial general liability coverage, worker's compensation and employer's
liability, with minimum limits acceptable to Landlord and, as applicable,
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commercial property coverages to protect the interests of all parties in the
Building.
ARTICLE 8. CONDEMNATION
8.1 SUBSTANTIAL TAKING. If all or a substantial part of the Premises are taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
the taking would prevent or materially interfere with the use of the Premises
for the purpose for which it is then being used, this Lease shall terminate and
the rent shall be abated during the unexpired portion of this Lease effective on
the date physical possession is taken by the condemning authority. Tenant shall
have no claim to the condemnation award or proceeds in lieu thereof, except that
Tenant shall be entitled to a separate award for the cost of removing and moving
its personal property.
8.2 PARTIAL TAKING. If all or a substantial part of the Premises are taken for
any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in Section 8.1 above, the rent payable
under this Lease during the unexpired portion of the term shall be adjusted to
such an extent as may be fair and reasonable under the circumstances. Tenant
shall have no claim to the condemnation award or proceeds in lieu thereof,
except that Tenant shall be entitled to a separate award for the cost of
removing and moving its personal property.
ARTICLE 9. ASSIGNMENT OR SUBLEASE
9.1 LANDLORD ASSIGNMENT. Landlord shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and in
the Building. Any such sale, transfer or assignment shall operate to release
Landlord from any and all liabilities under this Lease arising after the date of
such sale, assignment or transfer.
9.2 TENANT ASSIGNMENT. Other than an assignment to a parent, subsidiary or
affiliate, or to an entity or person which controls or is controlled by Tenant
("Permitted Assignee"), Tenant shall not assign, in whole or in part, this
Lease, or allow it to be assigned, in whole or in part, by operation of law or
otherwise (including without limitation by transfer of a majority interest of
stock, merger, or dissolution, which transfer of majority interest of stock,
merger or dissolution shall be deemed an assignment) or mortgage or pledge the
same, or sublet the Premises, in whole or in part, without the prior written
consent of Landlord, which consent shall not be unreasonably withheld, and in no
event shall said such assignment (whether to a Permitted Assignee or otherwise)
or sublease ever release Tenant or any guarantor from any obligation or
liability hereunder. Notwithstanding anything in this Lease to the contrary, in
the event of any assignment or sublease, any option or right of first refusal
granted to Tenant shall not be assignable by Tenant to any assignee or
sublessee. No assignee or sublessee of the Premises or any portion thereof may
assign or sublet the Premises or any portion thereof. Tenant shall provide
Landlord with written notice of an assignment to any Permitted Assignee.
9.3 CONDITIONS OF ASSIGNMENT. If Tenant desires to assign or sublet all or any
part of the Premises to a third party which is not a Permitted Assignee, it
shall so notify Landlord at least thirty (30) days in advance of the date on
which Tenant desires to make such assignment or sublease. Tenant shall provide
Landlord with a copy of the proposed assignment or sublease and such information
as Landlord might request concerning the proposed sublessee or assignee to allow
Landlord to make informed judgments as to the financial condition, reputation,
operations and general desirability of the proposed sublessee or assignee.
Within fifteen (15) days after Landlord's receipt of Tenant's proposed
assignment or sublease and all required information concerning the proposed
sublease or assignee, Landlord shall have the following options: (1) consent to
the proposed assignment or sublease, and, if the rent due and payable by any
assignee or sublessee under any such permitted assignment or sublease (or a
combination of the rent payable under such assignment or sublease plus any bonus
or any other consideration or any payment incident thereto) exceeds the rent
payable under this Lease for such space, Tenant shall pay to Landlord all such
excess rent, less Tenant's reasonable costs in completing the assignment or
subletting, and other excess consideration within ten (10) days following
receipt thereof by Tenant; or (2) refuse to consent to the proposed assignment
or sublease if such refusal is commercially reasonable, which refusal shall be
deemed to have been exercised unless Landlord gives Tenant written notice
providing otherwise. Upon the occurrence of an event of default, if all or any
part of the Premises are then assigned or sublet, Landlord, in addition to any
other remedies provided by this Lease or provided by law, may, at its option,
collect directly from the assignee or sublessee all rents becoming due to Tenant
by reason of the assignment or sublease, and Landlord shall have a security
interest in all properties on the Premises to secure payment of such sums. Any
collection directly by Landlord from the assignee or sublessee shall not be
construed to constitute a novation or a release of Tenant or any guarantor from
the further performance of its obligations under this Lease.
9.4 RIGHTS OF MORTGAGE. Tenant accepts this Lease subject and subordinate to any
recorded mortgage presently existing or hereafter created upon the Building and
to all existing recorded restrictions, covenants, easements and agreements with
respect to the Building. Landlord is hereby irrevocably vested with full power
and authority to subordinate Tenant's interest under this Lease to any first
mortgage lien hereafter placed on the Premises, and Tenant
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agrees upon demand to execute additional instruments subordinating this Lease as
Landlord may require, provided that such instruments expressly state that
Tenant's occupancy shall not be disturbed as long as Tenant is not in default.
If the interests of Landlord under this Lease shall be transferred by reason of
foreclosure or other proceedings for enforcement of any first mortgage or deed
of trust on the Premises, Tenant shall be bound to the transferee (sometimes
called the "Purchaser") at the option of the Purchaser, under the terms,
covenants and conditions of this Lease for the balance of the term remaining,
including any extensions or renewals, with the same force and effect as if the
Purchaser were Landlord under this Lease, and, if requested by the Purchaser,
Tenant agrees to attorn to the Purchaser, including the first mortgagee under
any such mortgage if it be the Purchaser, as its Landlord, provided said
Purchaser agrees in writing that Tenant shall not be disturbed in its possession
of the Premises so long as Tenant is not in default hereunder.
9.5 TENANT'S STATEMENT. Tenant agrees to furnish, no more than two (2) times
each calendar year, within ten (10) days after receipt of a request from
Landlord or Landlord's mortgagee, a statement certifying, if applicable, the
following: Tenant is in possession of the Premises; the Premises are acceptable;
the Lease is in full force and effect; the Lease is unmodified; Tenant claims no
present charge, lien, or claim or offset against rent; the rent is paid for the
current month, but is not prepaid for more than one month and will not be
prepaid for more than one month in advance; there is no existing default by
reason of some act or omission by Landlord; and such other matters as may be
reasonably required by Landlord or Landlord's mortgagee. Tenant's failure to
deliver such statement, in addition to being a default under this Lease, shall
be deemed to establish conclusively that this Lease is in full force and effect
except as declared by Landlord, that Landlord is not in default of any of its
obligations under this Lease, and that Landlord has not received more than one
month's rent in advance. Tenant agrees to furnish, no more than two (2) times
each calendar year, within ten (10) days after receipt of a request from
Landlord, a financial statement of Tenant containing the most recent quarterly
published information, certified as true and correct by Tenant.
ARTICLE 10. LANDLORD'S LIEN AND SECURITY AGREEMENT (Intentionally Omitted)
ARTICLE 11. DEFAULT AND REMEDIES
11.1 DEFAULT BY TENANT. The following shall be deemed to be events of default
("Default") by Tenant under this Lease: (1) Tenant shall fail to pay when due
any installment of rent or any other payment required pursuant to this Lease;
(2) Tenant shall abandon any substantial portion of the Premises; (3) Tenant
shall fail to comply with any term, provision or covenant of this Lease, other
than the payment of rent or additional rent, and the failure is not cured within
thirty (30) days after written notice to Tenant; (4) Tenant shall file a
petition or an involuntary petition is filed against Tenant; or Tenant becomes
insolvent under any applicable federal or state bankruptcy or insolvency law; or
Tenant admits that it cannot meet its financial obligations as they become due;
or a receiver or trustee shall be appointed for all or substantially all of the
assets of Tenant; or Tenant shall make a transfer in fraud of creditors or shall
make an assignment for the benefit of creditors; or (5) Tenant shall do or
permit to be done any act which results in a lien being filed against the
Premises or the Building and/or project of which the Premises are a part.
In the event that an order for relief is entered in any case under Title 11,
U.S.C. (the "Bankruptcy Code") in which Tenant is the debtor and: (A) Tenant as
debtor-in-possession, or any trustee who may be appointed in the case (the
"Trustee") seeks to assume the lease, then Tenant, or Trustee if applicable, in
addition to providing adequate assurance described in applicable provisions of
the Bankruptcy Code, shall provide adequate assurance to Landlord of Tenant's
future performance under the Lease by depositing with Landlord a sum equal to
the lesser of twenty-five percent (25%) of the rental and other charges due for
the balance of the Lease term or six (6) months' rent ("Security"), to be held
(in an interest bearing account) to secure Tenant's obligation under the Lease,
and (B) Tenant, or Trustee if applicable, seeks to assign the Lease after
assumption of the same, then Tenant, in addition to providing adequate assurance
described in applicable provisions of the Bankruptcy Code, shall provide
adequate assurance to Landlord of the proposed assignee's future performance
under the Lease by depositing with Landlord a sum equal to the Security to be
held (in an interest bearing account) to secure performance under the Lease.
Nothing contained herein expresses or implies, or shall be construed to express
or imply, that Landlord is consenting to assumption and/or assignment of the
Lease by Tenant, and Landlord expressly reserves all of its rights to object to
any assumption and/or assignment of the Lease. Neither Tenant nor any Trustee
shall conduct or permit the conduct of any "fire", "bankruptcy", "going out of
business" or auction sale in or from the Premises. The foregoing
notwithstanding, Tenant shall not be in default if Tenant vacates all or any
portion of the Premises and (i) Tenant, a Permitted Assignee, or an approved
subtenant or assignee occupies the Premises (or portion thereof) vacated by
Tenant within ninety (90) days after Tenant has vacated, and (ii) Tenant is not
in default under any other provision of this Lease.
11.2 REMEDIES FOR TENANT'S DEFAULT. Upon the occurrence of a Default as defined
above, Landlord may elect either (i) to cancel and terminate this Lease and this
Lease shall not be treated as an asset of Tenant's bankruptcy estate, or (ii) to
terminate Tenant's right to possession only without cancelling and terminating
Tenant's continued liability under this Lease. Notwithstanding
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the fact that initially Landlord elects under (ii) to terminate Tenant's right
to possession only, Landlord shall have the continuing right to cancel and
terminate this Lease by giving three (3) days' written notice to Tenant of such
further election, and shall have the right to pursue any remedy at law or in
equity that may be available to Landlord.
In the event of election under (ii) to terminate Tenant's right to possession
only, Landlord may, at Landlord's option, enter the Premises and take and hold
possession thereof, without such entry into possession terminating this Lease or
releasing Tenant in whole or in part from Tenant's obligation to pay all amounts
hereunder for the full stated term. Upon such reentry, Landlord may remove all
persons and property from the Premises and such property may be removed and
stored in a public warehouse or elsewhere at the cost and for the account of
Tenant, without becoming liable for any loss or damage which may be occasioned
thereby. Such reentry shall be conducted in the following manner: without resort
to judicial process or notice of any kind if Tenant has abandoned or voluntarily
surrendered possession of the Premises; and, otherwise, by resort to judicial
process. Upon and after entry into possession without termination of the Lease,
Landlord may, but is not obligated to, relet the Premises, or any part thereof,
to any one other than the Tenant, for such time and upon such terms as Landlord,
in Landlord's sole discretion, shall determine. Landlord may make alterations
and repairs to the Premises to the extent deemed by Landlord necessary or
desirable to relet the Premises.
Upon such reentry, Tenant shall be liable to Landlord as follows:
A. For all attorneys' fees incurred by Landlord in connection with exercising
any remedy hereunder;
B. For the unpaid installments of base rent, additional rent or
other unpaid sums which were due prior to such reentry,
including interest and late payment fees, which sums shall be
payable immediately.
C. For the installments of base rent, additional rent, and other
sums falling due pursuant to the provisions of this Lease for
the period after reentry during which the Premises remain
vacant, including late payment charges and interest, which
sums shall be payable as they become due hereunder.
D. For all expenses incurred in releasing the Premises, including
leasing commissions, attorneys' fees, and costs of alteration
or repairs, which shall be payable by Tenant as they are
incurred by Landlord; and
E. While the Premises are subject to any new lease or leases made
pursuant to this Section, for the amount by which the monthly
installments payable under such new lease or leases is less
than the monthly installment for all charges payable pursuant
to this Lease, which deficiencies shall be payable monthly.
Notwithstanding Landlord's election to terminate Tenant's right to possession
only, and notwithstanding any reletting without termination, Landlord, at any
time thereafter, may elect to terminate this Lease, and to recover (in lieu of
the amounts which would thereafter be payable pursuant to the foregoing, but not
in diminution of the amounts payable as provided above before termination), as
damages for loss of bargain and not as a penalty, an aggregate sum equal to the
amount by which the rental value of the portion of the term unexpired at the
time of such election is less than an amount equal to the unpaid base rent,
percentage rent, and additional rent and all other charges which would have been
payable by Tenant for the unexpired portion of the term of this Lease, which
deficiency and all expenses incident thereto, including commissions, attorneys'
fees, expenses of alterations and repairs, shall be due to Landlord as of the
time Landlord exercises said election, notwithstanding that the term had not
expired. If Landlord, after such reentry, leases the Premises, then the rent
payable under such new lease shall be conclusive evidence of the rental value of
the unexpired portion of the term of this Lease.
If this Lease shall be terminated by reason of bankruptcy or insolvency of
Tenant, Landlord shall be entitled to recover from Tenant or Tenant's estate, as
liquidated damages for loss of bargain and not as a penalty, the amount
determined by the immediately preceding paragraph.
11.3 LANDLORD'S RIGHT TO PERFORM FOR ACCOUNT OF TENANT. If Tenant shall be in
Default under this Lease, Landlord may cure the Default at any time for the
account and at the expense of Tenant. If Landlord cures a Default on the part of
Tenant, Tenant shall reimburse Landlord upon demand for any amount expended by
Landlord in connection with the cure, including, without limitation, attorneys'
fees and interest.
11.4 INTEREST, ATTORNEY'S FEES AND LATE CHARGE. In the event of a Default by
Tenant: (1) if a monetary default, interest shall accrue on any sum due and
unpaid at the rate of the lesser of twelve percent (12%) per annum or the
highest rate permitted by law and, if Landlord places in the hands of an
attorney the enforcement of all or any part of this Lease, the collection of any
rent due or to become due or recovery of the possession of the Premises, Tenant
agrees to pay Landlord's costs of collection, including reasonable attorney's
fees for the services of the attorney, whether suit is actually filed or not.
Other remedies for nonpayment of rent notwithstanding, if the monthly rental
payment or any other payment due from Tenant to Landlord is not received by
Landlord on or before the fifth (5th) day of the month for which the rent is
due,
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a late payment charge of five percent (5%) of such past due amount shall
become due and payable in addition to such amounts owed under this Lease.
11.5 ADDITIONAL REMEDIES, WAIVERS, ETC.
A. The rights and remedies of Landlord set forth herein shall be
in addition to any other right and remedy now and hereafter
provided by law. All rights and remedies shall be cumulative
and not exclusive of each other. Landlord may exercise its
rights and remedies at any times, in any order, to any extent,
and as often as Landlord deems advisable without regard to
whether the exercise of one right or remedy precedes, concurs
with or succeeds the exercise of another.
B. A single or partial exercise of a right or remedy shall not
preclude a further exercise thereof, or the exercise of
another right or remedy from time to time.
C. No delay or omission by Landlord in exercising a right or
remedy shall exhaust or impair the same or constitute a waiver
of, or acquiescence to, a Default.
D. No waiver of Default shall extend to or affect any other
Default or impair any right or remedy with respect thereto.
E. No action or inaction by Landlord shall constitute a waiver
of Default.
F. No waiver of a Default shall be effective unless it is in
writing and signed by Landlord.
11.6 LANDLORD DEFAULTS. At the option of Tenant, Landlord shall be considered in
default under the terms of this Lease if, during the term of this Lease,
Landlord fails to pay any amounts or perform any obligations required to be paid
or performed by Landlord and such failure continues for thirty (30) days after
written notice thereof is given to Landlord by Tenant. In the event of default
by Landlord, Tenant may immediately or at any time thereafter, upon notice, cure
such default for the account and at the expense of Landlord. If Tenant, by
reason of such default is compelled to pay or elects to pay any sum of money, or
is compelled to incur any expense, including reasonable attorney's fees, the
sums so paid, with interest thereon at the rate of twelve percent (12%) per
annum from the date of payment, shall be paid to Tenant by Landlord within five
(5) days of demand, or upon failure of Landlord to make such payment, the sums
so paid may be offset against the next rent installment(s).
ARTICLE 12. RELOCATION (Intentionally Omitted)
ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES
13.1 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY TENANT, AS A MATERIAL
CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF
THE PARTIES: THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR
TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN
WRITING IN THIS LEASE.
13.2 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED
EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT.
13.3 LIMITATION OF WARRANTIES. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE
ARE AND SHALL BE NO IMPLIED WARRANTIES OR MERCHANTABILITY, HABITABILITY, FITNESS
FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND
THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS
LEASE.
ARTICLE 14. MISCELLANEOUS
14.1 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to the
benefit of Landlord and Tenant and their respective heirs, personal
representatives, successors and assigns. It is hereby covenanted and agreed that
should Landlord's interest in the Premises cease to exist for any reason during
this Lease, then notwithstanding the happening of such event this Lease
nevertheless shall remain unimpaired and in full force and effect, and Tenant
hereunder agrees to attorn to the then owner of the Premises, if said owner
agrees not to disturb Tenant's occupancy, so long as Tenant is not in default
hereunder.
14.2 USE OR RENT TAX. If applicable in the jurisdiction where the Premises are
issued, Tenant shall pay and be liable for all rental, sales and use taxes or
other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Landlord under the terms of this
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Lease. Any such payment shall be paid concurrently with the payment of the rent,
additional rent, Operating Expenses or other charge upon which the tax is based
as set forth above.
14.3 ACT OF GOD. Neither Landlord nor Tenant shall be required to perform any
non-monetary covenant or obligation in this Lease, or be liable in damages to
the other, so long as the performance or non-performance of the non-monetary
covenant or obligation is delayed, caused or prevented by an act of God, force
majeure or by the other.
14.4 HEADINGS. The section headings appearing in this Lease are inserted only as
a matter of convenience and in no way define, limit, construe or describe the
scope or intent of any Section.
14.5 NOTICE. All rent and other payments required to be made by Tenant shall be
payable to Landlord at the address set forth in Section 1.8. All payments
required to be made by Landlord to Tenant shall be payable at the address set
forth in Section 1.8, or at any other address within the United States as Tenant
may specify from time to time by written notice. Any notice or document required
or permitted to be delivered by the terms of this Lease shall be deemed to be
delivered (whether or not actually received) when deposited in the United States
Mail, postage prepaid, certified mail, return receipt requested, addressed to
the parties at the respective addresses set forth in Section 1.8.
14.6 TENANT'S AUTHORITY. If Tenant executes this Lease as a corporation, each of
the persons executing this Lease on behalf of Tenant does hereby personally
represent and warrant that Tenant is a duly authorized and existing corporation,
that Tenant is qualified to do business in the state in which the Premises are
located, that the corporation has full right and authority to enter into this
Lease, and that each person signing on behalf of the corporation is authorized
to do so. In the event any representation or warranty is false, all persons who
execute this lease shall be liable, individually, as Tenant.
14.7 HAZARDOUS SUBSTANCES. Except for substances and quantities which are
normally used in the operation of Tenant's business or the maintenance or
operation of the Premises, and which are used, stored and disposed of in
accordance with all applicable environmental laws and regulations, Tenant, its
agents or employees, shall not bring or permit to remain on the Premises or
Building any asbestos, petroleum or petroleum products, explosives, toxic
materials, or substances defined as hazardous wastes, hazardous materials, or
hazardous substances under any federal, state, or local law or regulation
("Hazardous Materials"). Tenant's violation of the foregoing prohibition shall
constitute a material breach and default hereunder and Tenant shall indemnify,
hold harmless and defend Landlord from and against any claims, damages,
penalties, liabilities, and costs (including reasonable attorney fees and court
costs) caused by or arising out of (i) a violation of the foregoing prohibition
by Tenant or (ii) the presence of any Hazardous Materials on, under, or about
the Premises or the Building during the term of the Lease caused by or arising,
in whole or in part, out of the actions of Tenant, its agents or employees.
Tenant shall clean up, remove, remediate and repair any soil or ground water
contamination and damage caused by the presence and any release of any Hazardous
Materials in, on, under or about the Premises or the Building during the term of
the Lease caused by or arising, in whole or in part, out of the actions of
Tenant, its agents or employees, in conformance with the requirements of
applicable law. Tenant shall immediately give Landlord written notice of any
suspected breach of this paragraph; upon learning of the presence of any release
of any Hazardous Materials, and upon receiving any notices from governmental
agencies pertaining to Hazardous Materials which may affect the Premises or the
Building. The obligations of Tenant hereunder shall survive the expiration of
earlier termination, for any reason, of this Lease.
14.8 SEVERABILITY. If any provision of this Lease or the application thereof to
any person or circumstances shall be invalid or unenforceable to any extent, the
remainder of this Lease and the application of such provisions to other persons
or circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.
14.9 LANDLORD'S LIABILITY. If Landlord shall be in default under this Lease and,
if as a consequence of such default, Tenant shall recover a money judgment
against Landlord, such judgment shall be satisfied only out of the right, title
and interest of Landlord in the Building as the same may then be encumbered and
neither Landlord nor any person or entity comprising Landlord shall be liable
for any deficiency. In no event shall Tenant have the right to levy execution
against any property of Landlord nor any person or entity comprising Landlord
other than its interest in the Building as herein expressly provided.
14.10 BROKERAGE. Landlord and Tenant each represents and warrants to the other
that there is no obligation to pay any brokerage fee, commission, finder's fee
or other similar charge in connection with this Lease, other than fees due to
JOE ANTONUCCI OF LANDMARK PARTNERS, INC., which are the responsibility of
LANDLORD. Each party covenants that it will defend, indemnify and hold harmless
the other party from and against any loss or liability by reason of brokerage or
similar services alleged to have been rendered to, at the instance of, or agreed
upon by said indemnifying party. Notwithstanding anything herein to the
contrary, Landlord and Tenant agree that there shall be no brokerage fee or
commission due on expansions, options or renewals by Tenant.
14.11 MANAGEMENT AGENT. Landlord hereby notifies Tenant that the person
authorized to execute this Lease and manage the Premises is CSM Corporation, a
Minnesota corporation, which
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has been appointed to act as the agent in leasing management and operation of
the Building for owner and is authorized to accept service of process and
receive or give receipts for notices and demands on behalf of Landlord. Landlord
reserves the right to change the identity and status of its duly authorized
agent upon written notice to Tenant.
14.12 OPTION TO EXPAND. Tenant shall have a one time Option to Expand the area
of the Premises by 15,012 square feet in the "Option to Expand Area" depicted on
EXHIBIT B, which option shall be exercised, if at all, subject to the following
terms and conditions:
A. The additional 15,012 square feet of space to be provided pursuant to
this Option to Expand shall be delivered by Landlord to Tenant, if at
all, at any time from the expiration of lease month thirty-seven (37)
through the expiration of lease month forty-nine (49) of the term of
this Lease, as determined in Landlord's sole discretion and as
described in item (D) below;
B. The space shall be delivered in a warehouse finish condition, which,
for the purposes of this provision, shall mean:
CEILINGS: Exposed prime painted structural steel and metal
deck.
FLOORS: 5" reinforced, cure-sealed, concrete slab on grade.
WALLS: Demising walls shall be built with metal framing and
drywall to the underside of the structural deck
above, fire taped only, as required by local
governing codes. The interior surface of concrete
block walls shall remain unfinished.
HVAC: The warehouse area shall be heated only by means of gas
fired unit heaters to maintain 65(Degree) F.
FIRE PROTECTION: High bay brass upright
sprinkler heads for minimum
(ordinary hazard) density
requirements (laterals only, no
drops) are included as part of shell
building construction.
PLUMBING: A 6" PVC waste line under-floor and a 2" copper
cold water line overhead shall be included as part
of the shell building construction.
WAREHOUSE
LIGHTING: 8'-2" tube fluorescent light fixtures mounted at
roof joists are included to provide approximately
one fixture per 250 square feet of warehouse space.
LIGHT SWITCHES: All warehouse lights to be switched at the main
service panel.
ELECTRICAL OUTLETS: One (1) wall mounted, 120 volt duplex outlet has
been included at the main electric panel.
TELEPHONE OUTLETS: One (1) wall mounted telephone outlet shall be
included at the main electric panel.
EXIT LIGHTS & Emergency lighting shall be provided as required by
EMERGENCY LIGHTS: code and the Fire Marshall.
ELECTRICAL SERVICE: Main service shall be a 480/277 volt, 100 ampere
panel with a step down transformer to a 100 ampere,
120/208 volt panel.
C. The Base Rent for the space shall be $4.50 per square foot per year;
D. Landlord shall, prior to the expiration of lease month thirty (30),
notify the Tenant, in writing, that either: (i) Landlord will be able
to deliver the expansion space at the expiration of lease month
thirty-seven (37); or (ii) Landlord will be able to deliver the
expansion space at the expiration of lease month forty-nine (49).
E. Tenant may exercise this option, if at all, by giving Landlord
unconditional and irrevocable written notice of exercise within sixty
(60) days following receipt of Landlord's written notice of
availability of the space.
F. If Tenant fails to exercise its Option to Expand strictly in accordance
with the terms hereof, then the Option to Expand shall become null and
void.
G. Upon the exercise of this Option to Expand by Tenant, Landlord and
Tenant will promptly execute an addendum to this Lease to accomplish
the following:
(i) Add the expansion space to the leased Premises;
(ii) Establish the effective date for the delivery and addition of
such space;
(iii) Confirm that the initial term of the expansion option shall be
coterminous with the then existing lease;
(iv) Establish and confirm that the base rental for the expansion
space shall be the prevailing warehouse rate in effect at the
time of the initial term of the Lease.
(v) Adjust Tenant's operating expense participation percentage to
reflect the
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addition of the expansion space, from and after the effective
date thereof;
H. It is an express condition of Tenant's exercise of this Option to
Expand that Tenant not be in Default in the performance of its
obligations under the Lease.
14.13 OPTION TO EXTEND TERM. If this Lease has not been previously canceled or
terminated and if Tenant is not then in default under this Lease, then Tenant
shall have the option to extend the lease term upon the same conditions and
covenants contained in this Lease for two (2) consecutive periods of three (3)
years each (singularly "Renewal Term") except that (i) the Base Rent during any
Renewal Term shall be the market Base Rent as of the commencement date of the
Renewal Term in question multiplied by the rentable square footage of the
Premises, and (ii) Landlord's obligations relative to replacement of HVAC unit
compressors or heat exchangers shall be modified such that Landlord shall be
entitled to recover the full costs of any such replacements, monthly during the
term of the Lease, on an amortized basis, with the cost being amortized over the
useful life of the replacement at an amortization rate equal to US Treasury
Securities having a term comparable to the useful life of the replacement item.
The first Renewal Term shall commence on the date the original term of this
Lease expires and the second Renewal Term shall commence on the last day of the
then expiring Renewal Term. Tenant shall exercise each option by giving
unconditional and irrevocable written notice of exercise to Landlord by the
later of (a) forty-five (45) days after Landlord notifies Tenant of Landlord's
determination of the market Base Rent (which notice shall be given not later
than nine (9) months prior to the expiration of the original lease term or the
first Renewal Term), or (b) two hundred ten (210) days prior to the expiration
of the original term of this Lease or any Renewal Term, as the case may be. If
not timely exercised, all of Tenant's options to extend the term of this Lease
shall expire and Tenant shall have no further right to extend the term of this
Lease.
14.14 MEMORANDUM OF LEASE. Tenant and Landlord shall, upon the written request
of the other, execute a memorandum or short form lease in a form suitable for
recording. Said memorandum of lease shall be dated on the date and year of the
execution of this Lease and shall disclose the parties, the term of this Lease
and such other terms and conditions of this Lease as Tenant may reasonably
require. In the event that any such instrument is recorded, Tenant shall, upon
request of Landlord following the expiration or earlier termination of this
Lease, execute and deliver a quit claim deed for the property or other
instrument that is reasonable in form and that memorializes the occurrence and
effect of any such expiration or termination.
14.15 SUBMISSION OF LEASE. Submission of this Lease to Tenant for signature does
not constitute a reservation of space or an option to lease. This Lease is not
effective until execution by and delivery to both Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease effective the
day and year first above written.
LANDLORD TENANT
- -------- ------
CSM INVESTORS, INC. FIELDWORKS, INC.
BY: /S/ DAVID CARLAND BY: /S/ STEVEN A. MANSKE
ITS: VICE PRESIDENT ITS: VICE PRESIDENT OF FINANCE
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THE FOLLOWING EXHIBITS TO THE LEASE HAVE BEEN OMITTED IN THIS EDGAR FILING:
Exhibit A Illustration of the site plan
Exhibit B Floor plans of the building
Exhibit C Outline of building specifications
Exhibit D Example of addendum to lease
Exhibit E Signage criteria
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EXHIBIT 10.36
ADDENDUM TO LEASE
This is an ADDENDUM to that certain Lease dated May 16, 1997, ("Lease") by and
between CSM PROPERTIES, INC., a Minnesota corporation, ("Landlord") and
FIELDWORKS, INC., a Minnesota corporation, ("Tenant"), and is entered into
effective this 30th day of December, 1997.
In consideration of the mutual covenants herein contained, and other good and
valuable consideration, Landlord and Tenant hereby confirm and/or agree as
follows:
1. SECTION 1.2 PREMISES. Landlord and Tenant acknowledge and confirm that the
rentable area of the Premises is 52,769 square feet.
2. SECTION 1.4 BASE RENT. The BAse rent for the Lease Term shall be:
Lease Monthly Annual Per
Months Base Rent Base Rent Sq. Ft.
- ------ --------- --------- -------
Initial Term
11/20/97-12/28/97 $22,766.45 $273,197.40 $8.70 (based on 31,402sf office)
12/29/97-11/30/01 $38,257.53 $459,090.30 $8.70 (based on 52,769sf
ofice/warehouse/
manufacturing)
12/1/01-11/30/04 $40,192.39 $482,308.66 $9.14
Option Term
12/1/04-1/30/07 market market market
12/1/07-11/30/10 market market market
3. SECTION 1.7 PRO RATE SHARE. Landlord and Tenant acknowledge and confirm that
Tenant's pro rata share of operating expenses shall be sixty two and thirteen
one hundredths per cent (62.13%).
4. MISCELLANEOUS. If any provision of the Lease is inconsistent with the
provisions contained herein, then and in such event the provisions of this
Addendum shall control. Except as expressly modified herein, all other terms and
conditions of the Lease shall remain unchanged, and in full force and effect.
LANDLORD: TENANT:
- --------- -------
CSM PROPERTIES, INC. FIELDWORKS, INC.
BY: /s/ David Carland BY: /s/ Karen L. Engebretson
ITS: Vice President ITS: CFO/VP FINANCE
<PAGE>
EXHIBIT 10.37
SUBLEASE AGREEMENT
This Agreement is made as of the 6th day of November 1997 between
Fieldworks, Inc. (a Minnesota corporation), hereinafter referred to as
"Sublessor", and Golf Galaxy (a Minnesota corporation) hereinafter referred to
as "Sublessee".
WITNESSETH, WHEREAS:
Sublessor, as Tenant, entered into a lease with Northwestern Mutual
Life Insurance Co., as Landlord, dated May 10, 1994 for 12,386 square feet, and
as amended on May 22, 1996 and subsequently assigned from Northwestern Mutual
Life Insurance Co. to The Principal Mutual Life Insurance Co., by sale of the
building for leasing space at 9947-9969 Valley View Road, Eden Prairie,
Minnesota, (the "Building"), to which lease (hereinafter, the "Prime Lease")
reference is hereby made and a copy is attached hereto as Exhibit B, and which
is incorporated by reference as if the same were hereinafter set forth at
length; and
The parties hereto have agreed that Sublessor shall sublet all of such
space to Sublessee;
Now, therefore, the parties hereto hereby covenant and agree as
follows:
1) Sublessor hereby subleases to Sublessee approximately 9,674 square feet
of the space in said Building, described as Bay A as depicted on
Exhibit A attached hereto and made a part hereof, (the "Subleased
Premises") for a term beginning January 15, 1998 and ending June 30,
1999 at a gross rental rate of Seven Thousand Five Hundred and 00/100
Dollars ($7,500.00) per month. Sublessee shall pay said gross rent
provided for hereunder in monthly installments in advance on the first
day of each and every month during the term hereof, commencing February
1, 1998. Electricity, gas, garbage removal and phone hook-ups shall be
in the name of Sublessee and paid for directly by Sublessee commencing
January 15, 1998.
2) The Subleased Premises shall be used for the purposes of general
office.
3) Sublessee shall not assign its interest in this Sublease nor further
sublet the Subleased Premises in whole or in part; and shall not permit
its interest in this Sublease to be vested in any third party by
operation of law or otherwise, without written permission from
Sublessor and Landlord.
4) This Sublease is subject and subordinate to the Prime Lease. Except as
may be inconsistent with the terms hereof, all terms, covenants and
conditions contained in the Prime Lease shall be applicable to this
Sublease with the same force and effect as if Sublessor were the
Landlord under the Prime Lease and Sublessee were the Tenant
thereunder, and in case of any breach hereof by Sublessee, Sublessor
shall have all rights against Sublessee as would be available to the
Landlord against the Tenant under the Prime Lease if such breach were
by the Tenant thereunder (subject to Sublessee's limited repair
obligation).
<PAGE>
Sublease Agreement
Page 2
5) Notwithstanding anything to the contrary herein set forth, the only
services or rights to which Sublessee may be entitled hereunder are
those to which Sublessor may be entitled under the Prime Lease.
6) Sublessee and Sublessor shall neither do nor permit anything to be done
which would cause the Prime Lease to be terminated or forfeited by
reason of any right of termination or forfeiture reserved or vested in
the Landlord under the Prime Lease. Sublessee and Sublessor shall
indemnify and hold each other harmless from and against all claims or
expenses of any kind whatsoever by reason of the other parties breach
of the Prime Lease or this Sublease.
7) Sublessee has paid Sublessor on the execution and delivery of this
Sublease the sum of Five Thousand and 00/100 Dollars ($5,000.00) as
security for the full and faithful performance of the terms, covenants
and conditions of this sublease on Sublessee's part to be performed or
observed, including but not limited to payment of gross rent in default
or for any other sum which Sublessor may expend or be required to
expend by reason of Sublessee's default, including any damages or
deficiency in reletting the Subleased Premises, in whole or in part,
whether such damages shall accrue before or after summary proceedings
or other re-entry by Sublessor or the Prime Landlord. If Sublessee
shall fully and faithfully comply with all the terms, covenants and
conditions of this sublease on Sublessee's part to be performed or
observed, the security, or any unapplied balance thereof, shall be
returned to Sublessee after the time fixed as the expiration of the
demised term and after the removal of Sublessee and surrender of
possession of the Subleased Premises to Sublessor. In no event shall
the security deposit be withheld at the expiration of the Sublease term
for repair or restoration of items that existed at the Commencement of
the Sublease term. The Sublessee reserves the right to submit a
punchlist of such potential items to Sublessor within ten (10) days
after occupancy of the Subleased Premises.
8) To the best of Sublessor's knowledge, the roof and all mechanical
systems serving the Subleased Premises are in good condition as of the
Commencement of this Agreement. Sublessor agrees to demise the
Subleased Premises, paint the new wall, patch any holes in the existing
walls, shampoo the carpet and re-key the Subleased Premises. Other than
the improvements described above, Sublessee agrees to accept the
Subleased Premises in its "as-is" condition. Any other improvements to
the premises shall be completed by the Sublessee, at Sublesee's sole
cost and expense, with Sublessor's prior written approval.
9) It is expressly agreed that Sublessor shall have no responsibility or
liability for damage caused to any inventory or personal property
placed by Sublessee in the Subleased Premises except for liability
resulting from Sublessor's negligence or misconduct, and Sublessee
agrees to carry, at its own expense, adequate inventory insurance and
public liability insurance. Sublessee shall comply with all Tenant's
insurance obligations under Article 16 of the Prime Lease. Sublessor
and Landlord shall be named as additional insureds. Sublessee has the
right to self insure.
10) To the best of Sublessor's knowledge, no hazardous materials are
currently being stored in nor will any hazardous materials be left in
the Subleased Premises upon Sublessor's vacation of the Sublease
Premises.
<PAGE>
Sublease Agreement
Page 3
11) Sublessee represents that it has read and is familiar with the terms of
the Prime Lease and all related documents found in Exhibit B.
12) All prior understandings and agreements between the parties are merged
within this agreement, which alone fully and completely set forth the
understanding of the parties; and this Sublease may not be changed or
terminated orally or in any manner other than by an agreement in
writing to which the written consent of the Landlord under the Prime
Lease shall have been obtained.
13) Any notice or demand which either party may or must give to the other
hereunder shall be in writing and delivered personally or sent by
certified mail, return receipt requested, addressed to Sublessor as
follows:
Fieldworks, Inc.
7631 Anagram Drive
Eden Prairie, MN 55344
and to Sublessee, as follows:
Golf Galaxy
9963 Valley View Road
Eden Prairie, MN 55344
with a copy thereof to the Landlord under the Prime Lease in the manner
and at the place designated in the Prime Lease. Either party may, by
notice in writing, direct that future notices or demands to be sent to
a different address. Sublessor agrees to promptly notify Sublessee in
the event any notice of default is received from the Prime Lessor which
affects the Subleased Premises.
14) The covenants and agreements herein contained shall bind and inure to
the benefit of Sublessor, Sublessee and their respective heirs,
executors, administrators, successors and assigns.
SUBLESSEE: SUBLESSOR:
GOLF GALAXY FIELDWORKS, INC.
(A MINNESOTA CORPORATION) (A MINNESOTA CORPORATION)
By: /S/ GREG MONUM By: /S/ KAREN L. ENGEBRETSON
Its: EXECUTIVE VICE PRESIDENT Its: CFO/ VP OF FINANCE
Date: NOVEMBER 19, 1997 Date: NOVEMBER 24, 1997
<PAGE>
EXHIBIT 10.38
SUBLEASE AGREEMENT
This Agreement is made as of the 5th day of December 1997 between
Fieldworks, Inc. (a Minnesota corporation), hereinafter referred to as
"Sublessor", and LSC, Inc. (a Minnesota corporation) hereinafter referred to as
"Sublessee".
WITNESSETH, WHEREAS:
Sublessor, as Tenant, entered into a lease with Northwestern Mutual
Life Insurance Co., as Landlord, dated May 13, 1994 for 12,153 square feet and a
lease dated May 10, 1994 for 12,386 square feet, and as amended on May 22, 1997
and subsequently assigned from Northwestern Mutual Life Insurance Co. to The
Principal Mutual Life Insurance Co., by sale of the building for leasing space
at 9947-9969 Valley View Road, Eden Prairie, Minnesota, (the "Building"), to
which lease (hereinafter, the "Prime Lease") reference is hereby made and a copy
is attached hereto as Exhibit B, and which is incorporated by reference as if
the same were hereinafter set forth at length; and
The parties hereto have agreed that Sublessor shall sublet all of such
space to Sublessee;
Now, therefore, the parties hereto hereby covenant and agree as
follows:
1) Sublessor hereby subleases to Sublessee approximately 11,588 square
feet of the space in said Building, described as the office area only
of Bay B and the entire Bay C as depicted on Exhibit A attached hereto
and made a part hereof, (the "Subleased Premises") for a term beginning
February 1, 1998 and ending June 30, 1999 at a gross rental rate of
Eight Thousand Five Hundred and 00/100 Dollars ($8,500.00) per month.
Sublessee shall pay said gross rent provided for hereunder in monthly
installments in advance on the first day of each and every month during
the term hereof, commencing February 1, 1998, to the Sublessor at the
address in Article 12. For the purpose of this agreement, Gross Rent
shall include all amounts due to Sublessor, including base rent, common
area maintenance expenses, real estate taxes, utilities, and any
repairs required to the HVAC systems serving the Subleased Premises.
Garbage removal, janitorial services and phone hook-ups shall be in the
name of Sublessee and paid for directly by Sublessee commencing
February 1, 1998.
2) The Subleased Premises shall be used for the purposes of general office
and warehouse.
3) Sublessee shall not assign its interest in this Sublease nor further
sublet the Subleased Premises in whole or in part; and shall not permit
its interest in this Sublease to be vested in any third party by
operation of law or otherwise, without written permission from
Sublessor and Landlord.
4) This Sublease is subject and subordinate to the Prime Lease. Except as
may be inconsistent with the terms hereof, all terms, covenants and
conditions contained in the Prime Lease shall be
<PAGE>
Sublease Agreement
Page 2
applicable to this Sublease with the same force and effect as if
Sublessor were the Landlord under the Prime Lease and Sublessee were
the Tenant thereunder, and in case of any breach hereof by Sublessee,
Sublessor shall have all rights against Sublessee as would be available
to the Landlord against the Tenant under the Prime Lease if such breach
were by the Tenant thereunder (subject to Sublessee's limited repair
obligation).
5) Notwithstanding anything to the contrary herein set forth, the only
services or rights to which Sublessee may be entitled hereunder are
those to which Sublessor may be entitled under the Prime Lease.
6) Sublessee and Sublessor shall neither do nor permit anything to be done
which would cause the Prime Lease to be terminated or forfeited by
reason of any right of termination or forfeiture reserved or vested in
the Landlord under the Prime Lease. Sublessee and Sublessor shall
indemnify and hold each other harmless from and against all claims or
expenses of any kind whatsoever by reason of the other parties breach
of the Prime Lease or this Sublease.
7) Sublessee has paid Sublessor on the execution and delivery of this
Sublease the sum of Eight Thousand Five Hundred and 00/100 ($8,500.00)
as security for the full and faithful performance of the terms,
covenants and conditions of this sublease on Sublessee's part to be
performed or observed, including but not limited to payment of gross
rent in default or for any other sum which Sublessor may expend or be
required to expend by reason of Sublessee's default, including any
damages or deficiency in reletting the Subleased Premises, in whole or
in part, whether such damages shall accrue before or after summary
proceedings or other re-entry by Sublessor or the Prime Landlord. If
Sublessee shall fully and faithfully comply with all the terms,
covenants and conditions of this sublease on Sublessee's part to be
performed or observed, the security, or any unapplied balance thereof,
shall be returned to Sublessee within thirty (30) days after the time
fixed as the expiration of the demised term and after the removal of
Sublessee and surrender of possession of the Subleased Premises to
Sublessor in the condition that existed at the Commencement of the
Sublease, normal wear and tear excepted.
8) Sublessor agrees to demise the Subleased Premises as shown in Exhibit
A, patch any holes in the existing walls, re-paint the office walls,
shampoo the carpet and re-key the Subleased Premises. Other than the
improvements described above, Sublessee agrees to accept the Subleased
Premises in its "as-is" condition. Any other improvements to the
premises, including the costs to re-wire the telephone equipment,
security systems or computer equipment, shall be completed by the
Sublessee, at Sublesee's sole cost and expense, with Sublessor's prior
written approval.
9) It is expressly agreed that Sublessor shall have no responsibility or
liability for damage caused to any inventory or personal property
placed by Sublessee in the Subleased Premises except for liability
resulting from Sublessor's negligence or misconduct, and Sublessee
agrees to carry, at its own expense, adequate inventory insurance and
public liability insurance. Sublessee shall comply
<PAGE>
Sublease Agreement
Page 3
with all Tenant's insurance obligations under Article 16 of the Prime
Lease. Sublessor and Landlord shall be named as additional insureds.
10) Sublessee represents that it has read and is familiar with the terms of
the Prime Lease and all related documents found in Exhibit B. Sublessor
represents these are all documents relevant to the existing Lease of
the Subleased Premises.
11) All prior understandings and agreements between the parties are merged
within this agreement, which alone fully and completely set forth the
understanding of the parties; and this Sublease may not be changed or
terminated orally or in any manner other than by an agreement in
writing to which the written consent of the Landlord under the Prime
Lease shall have been obtained.
12) Any notice or demand which either party may or must give to the other
hereunder shall be in writing and delivered personally or sent by
certified mail, return receipt requested, addressed to Sublessor as
follows:
Fieldworks, Inc.
7631 Anagram Drive
Eden Prairie, MN 55344
and to Sublessee, as follows:
LSC, Inc.
9955 Valley View Road
Eden Prairie, MN 55344
with a copy thereof to the Landlord under the Prime Lease in the manner
and at the place designated in the Prime Lease. Either party may, by
notice in writing, direct that future notices or demands to be sent to
a different address. Sublessor agrees to notify Sublessee within five
(5) days in the event any notice of default is received from the Prime
Lessor which affects the Subleased Premises.
13) Sublessor agrees as a condition of the Sublease to allow Sublessee to
use the existing security system and telephone system (with voice mail)
during the term of this Sublease Agreement, at no additional cost to
Sublessee. Additionally, Sublessor agrees to give to Sublessee the two
existing refrigerators and microwave ovens as a condition of this
Sublease Agreement.
14) The covenants and agreements herein contained shall bind and inure to
the benefit of Sublessor, Sublessee and their respective heirs,
executors, administrators, successors and assigns.
<PAGE>
15) Sublessor represents it is in full compliance with Article 37 of the
Prime Lease and to the best of Sublessor's knowledge, no hazardous
materials are currently being stored in nor will any hazardous
materials be left in the Subleased Premises upon Sublessor's vacation
of the Subleased Premises.
16) Sublessor will allow Sublessee to install signage that complies with
the Prime Lease.
SUBLESSEE: SUBLESSOR:
LSC, INC. FIELDWORKS, INC.
(A MINNESOTA CORPORATION) (A MINNESOTA CORPORATION)
By: /S/ BRAD BALOGH By: /S/ KAREN L. ENGEBRETSON
Its: PRESIDENT/CEO Its: CFO/ VP OF FINANCE
Date: DECEMBER 10, 1997 Date: DECEMBER 11, 1997
<PAGE>
EXHIBIT 10.39
SUBLEASE AGREEMENT
This Agreement is made as of the 6th day of January 1998 between
Fieldworks, Inc. (a Minnesota corporation), hereinafter referred to as
"Sublessor", and Apartment Search, Inc. (a Minnesota corporation) hereinafter
referred to as "Sublessee".
WITNESSETH, WHEREAS:
Sublessor, as Tenant, entered into a lease with Northwestern Mutual
Life Insurance Co., as Landlord, dated May 13, 1994 for 12,153 square feet and a
lease dated May 10, 1994 for 12,386 square feet, and as amended on May 22, 1997
and subsequently assigned from Northwestern Mutual Life Insurance Co. to The
Principal Mutual Life Insurance Co., by sale of the building for leasing space
at 9947-9969 Valley View Road, Eden Prairie, Minnesota, (the "Building"), to
which lease (hereinafter, the "Prime Lease") reference is hereby made and a copy
is attached hereto as Exhibit B, and which is incorporated by reference as if
the same were hereinafter set forth at length; and
The parties hereto have agreed that Sublessor shall sublet all of such
space to Sublessee;
Now, therefore, the parties hereto hereby covenant and agree as
follows:
1) Sublessor hereby subleases to Sublessee approximately 3,117 square feet
of the space in said Building, described as the warehouse area only of
Bay B as depicted on Exhibit A attached hereto and made a part hereof,
(the "Subleased Premises") for a term beginning January 15, 1998 and
ending June 30, 1999 at a gross rental rate of One Thousand Eight
Hundred Eighteen and 25/100 Dollars ($1,818.25) per month. Sublessee
shall pay said gross rent provided for hereunder in monthly
installments in advance on the first day of each and every month during
the term hereof, commencing January 15, 1998, to the Sublessor at the
address in Article 12. For the purpose of this agreement, Gross Rent
shall include all amounts due to Sublessor, including base rent, common
area maintenance expenses, real estate taxes and utilities. Garbage
removal, janitorial services and phone hook-ups shall be in the name of
Sublessee and paid for directly by Sublessee commencing January 15,
1998.
2) Sublessee shall have the option to terminate the term of the Sublease
on February 1, 1999 by providing Sublessor with sixty (60) days prior
written notice and a termination penalty payment in the amount of $0.
3) The Subleased Premises shall be used for the purposes of storage of
computer equipment.
4) Sublessee shall not assign its interest in this Sublease nor further
sublet the Subleased Premises in whole or in part; and shall not permit
its interest in this Sublease to be vested in any third party by
operation of law or otherwise, without written permission from
Sublessor and Landlord.
5) This Sublease is subject and subordinate to the Prime Lease. Except as
may be inconsistent with the terms hereof, all terms, covenants and
conditions contained in the Prime Lease shall be applicable to this
Sublease with the same force and effect as if Sublessor were the
Landlord under the Prime Lease and Sublessee were the Tenant
thereunder, and in case of any breach hereof by
<PAGE>
Sublease Agreement
Page 2
Sublessee, Sublessor shall have all rights against Sublessee as would
be available to the Landlord against the Tenant under the Prime Lease
if such breach were by the Tenant thereunder (subject to Sublessee's
limited repair obligation).
6) Notwithstanding anything to the contrary herein set forth, the only
services or rights to which Sublessee may be entitled hereunder are
those to which Sublessor may be entitled under the Prime Lease.
7) Sublessee and Sublessor shall neither do nor permit anything to be done
which would cause the Prime Lease to be terminated or forfeited by
reason of any right of termination or forfeiture reserved or vested in
the Landlord under the Prime Lease. Sublessee and Sublessor shall
indemnify and hold each other harmless from and against all claims or
expenses of any kind whatsoever by reason of the other parties breach
of the Prime Lease or this Sublease.
8) Sublessee has paid Sublessor on the execution and delivery of this
Sublease the sum of Eighteen Hundred Eighteen and 25/100 ($1,818.25) as
security for the full and faithful performance of the terms, covenants
and conditions of this sublease on Sublessee's part to be performed or
observed, including but not limited to payment of gross rent in default
or for any other sum which Sublessor may expend or be required to
expend by reason of Sublessee's default, including any damages or
deficiency in reletting the Subleased Premises, in whole or in part,
whether such damages shall accrue before or after summary proceedings
or other re-entry by Sublessor or the Prime Landlord. If Sublessee
shall fully and faithfully comply with all the terms, covenants and
conditions of this sublease on Sublessee's part to be performed or
observed, the security, or any unapplied balance thereof, shall be
returned to Sublessee within thirty (30) days after the time fixed as
the expiration of the demised term and after the removal of Sublessee
and surrender of possession of the Subleased Premises to Sublessor in
the condition that existed at the Commencement of the Sublease, normal
wear and tear excepted.
9) Sublessor agrees to demise the Subleased Premises as shown in Exhibit
A. Other than the improvements described above, Sublessee agrees to
accept the Subleased Premises in its "as-is" condition. Any other
improvements to the premises shall be completed by the Sublessee, at
Sublessee's sole cost and expense, with Sublessor's prior written
approval.
10) It is expressly agreed that Sublessor shall have no responsibility or
liability for damage caused to any inventory or personal property
placed by Sublessee in the Subleased Premises except for liability
resulting from Sublessor's negligence or misconduct, and Sublessee
agrees to carry, at its own expense, adequate inventory insurance and
public liability insurance. Sublessee shall comply with all Tenant's
insurance obligations under Article 16 of the Prime Lease. Sublessor
and Landlord shall be named as additional insureds.
11) Sublessee represents that it has read and is familiar with the terms of
the Prime Lease and all related documents found in Exhibit B. Sublessor
represents these are all documents relevant to the existing Lease of
the Subleased Premises.
12) All prior understandings and agreements between the parties are merged
within this agreement, which alone fully and completely set forth the
understanding of the parties; and this Sublease may
<PAGE>
Sublease Agreement
Page 3
not be changed or terminated orally or in any manner other than by an
agreement in writing to which the written consent of the Landlord under
the Prime Lease shall have been obtained.
13) Any notice or demand which either party may or must give to the other
hereunder shall be in writing and delivered personally or sent by
certified mail, return receipt requested, addressed to Sublessor as
follows:
Fieldworks, Inc.
7631 Anagram Drive
Eden Prairie, MN 55344
and to Sublessee, as follows:
Apartment Search, Inc.
7200 France Avenue South #237
Edina, MN 55435
with a copy thereof to the Landlord under the Prime Lease in the manner
and at the place designated in the Prime Lease. Either party may, by
notice in writing, direct that future notices or demands to be sent to
a different address.
14) The covenants and agreements herein contained shall bind and inure to
the benefit of Sublessor, Sublessee and their respective heirs,
executors, administrators, successors and assigns.
SUBLESSEE: SUBLESSOR:
APARTMENT SEARCH, INC. FIELDWORKS, INC.
(A MINNESOTA CORPORATION) (A MINNESOTA CORPORATION)
By: /S/ DAVID BROWN By: /S/ KAREN L. ENGEBRETSON
Its: DIRECTOR OF REAL ESTATE Its: CFO/ VP OF FINANCE
Date: JANUARY 9, 1998 Date: JANUARY 12, 1998
<PAGE>
Exhibit 11.1
FIELDWORKS, INCORPORATED AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 4, JANUARY 5, DECEMBER 31,
1998 1997 1995
----------- ----------- ------------
<S> <C> <C> <C>
BASIC AND DILUTED:
Net loss $(1,023,978) $(3,296,046) $ (626,919)
=========== =========== ============
Weighted average common shares outstanding 8,125,147 5,865,270 5,554,171
Effect of conversion of preferred shares (1) 117,287 576,923 576,923
----------- ----------- -----------
8,242,434 6,442,193 6,131,094
=========== =========== ===========
NET LOSS PER COMMON SHARE $ (.12) $ (.51) $ (.10)
=========== =========== ===========
</TABLE>
(1) Gives effect to preferred shares which converted to common shares
concurrent with the company's initial public offering.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Selected Consolidated
Operations Data:
<TABLE>
<CAPTION>
Year Ended Year Ended Years Ended December 31,
January 4, January 5, ----------------------------------------
(in thousands, except per share amounts) 1998 1997 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net sales $ 23,815 $ 13,111 $ 8,242 $ 2,742 $ --
======== ======== ======== ======== ========
Cost of sales 15,395 8,311 4,980 1,978 --
-------- -------- -------- -------- --------
Gross profit 8,420 4,800 3,262 764 --
Operating expenses:
Sales and marketing 4,268 3,235 1,523 904 36
General and administrative 3,034 2,232 1,169 762 160
Research and development 1,884 1,896 948 765 289
------------------------------------------------------------------------
Total operating expenses 9,186 7,363 3,640 2,431 485
------------------------------------------------------------------------
Operating loss (766) (2,563) (378) (1,667) (485)
Interest expense and other, net (258) (356) (69) (21) --
------------------------------------------------------------------------
Net loss from continuing operations (1,024) (2,919) (447) (1,688) (485)
Loss from discontinued operation(1) -- (377) (180) -- --
------------------------------------------------------------------------
Net loss $ (1,024) $ (3,296) $ (627) $ (1,688) $ (485)
========================================================================
Basic and diluted loss per common share:
Net loss per common share from
continuing operations $ (.12) $ (.45) $ (.07) $ (.31) $ (.16)
Loss per common share from
discontinued operation(1) -- (.06) (.03) -- --
------------------------------------------------------------------------
Net loss per common share $ (.12) $ (.51) $ (.10) $ (.31) $ (.16)
========================================================================
Weighted average common
shares outstanding 8,242 6,442 6,131 5,430 2,993
========================================================================
Selected Consolidated
Balance Sheet Data:
Cash $ 3,219 $ 2,132 $ 113 $ 126 $ 1,230
Working capital 11,517 1,042 1,685 1,317 1,845
Total assets 16,120 9,906 4,559 3,603 2,008
Long-term debt and capital lease
obligations, less current portion 23 67 62 11 --
Total debt 70 6,150 1,254 809 --
Accumulated deficit (7,327) (6,303) (2,805) (2,173) (485)
Total shareholders' equity 12,799 1,813 2,132 1,636 1,919
</TABLE>
(1) In November 1996, the Company's Board of Directors approved the distribution
of all of the issued and outstanding shares of the common stock of the Company's
wholly-owned subsidiary, Paragon Technology, Incorporated (Paragon) as a
dividend to shareholders of record of the Company as of November 15, 1996.
Paragon's results of operations for the years ended January 5, 1997 and December
31, 1995, as well as the estimated loss from disposition, have been presented as
a discontinued operation in the above Selected Consolidated Financial Data.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements. This annual report
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. When used in this annual report, the words or phrases
"believes," "anticipates," "expects," "intends," "estimates" or similar
expressions are intended to identify such forward-looking statements, but are
not the exclusive means of identifying such statements. These forward-looking
statements involve risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, the following: risks associated with the development of new
products, market acceptance of new products, technological obsolescence,
dependence on third-party manufacturers and suppliers, risks associated with the
Company's dependence on proprietary technology and the long customer sales
cycle. The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to revise any forward-looking statements in
order to reflect events or circumstances after the date of such statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
Operating Results. The following table sets forth certain financial data
expressed as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
For the Years Ended January 4, 1998 January 5, 1997 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 65 63 60
--- --- ---
Gross profit 35 37 40
Operating expenses:
Sales and marketing 18 25 18
General and administrative 12 17 14
Research and development 8 14 12
--- --- ---
Total operating expenses 38 56 44
Operating loss (3) (19) (4)
Interest expense and other, net (1) (3) (1)
--- --- ---
Net loss from continuing operations (4) (22) (5)
Loss from discontinued operation -- (3) (3)
--- --- ---
Net loss (4)% (25)% (8)%
=== === ===
</TABLE>
Market Trends. The worldwide market for portable personal computers is expanding
rapidly. The availability of high powered portable computer technology coupled
with application specific technologies and the proliferation of wireless
communications contributes to the increased demand. The Company expects
increased requirements to improve the efficiency in field based work forces and
link field workers into corporate information systems. These requirements have
contributed to the historical year-to-year increases in sales and the Company
believes this will continue in the foreseeable future.
The Company targets those markets which require portable computing platforms
that can perform multiple functions including diagnostics, data acquisition and
electronic testing and monitoring. Specifically, the Company is targeting five
vertical markets: Heavy Equipment/Trucking, Utilities, Public Safety,
Government/Military, and Medical. Each of these vertical markets continues to
experience growth in field service computer application requirements.
13
<PAGE>
COMPARISON OF YEARS ENDED
JANUARY 4, 1998 AND JANUARY 5, 1997
Net Sales. Net sales for 1997 were $23.8 million, an increase of $10.7 million
or 82% compared to 1996 sales of $13.1 million. This increase was primarily
attributable to an increase in the number of units sold (an increase of 97%)
which was partially offset by reductions in the average selling prices of the
7000 Series products and an increase in the number of 5000 Series units sold
throughout 1997, which carries lower pricing. Sales of the 5000 Series
represented 46% of net sales in 1997 and 17% in 1996. The Company experienced
net sales growth in all key vertical markets, the most significant increase
occurring in the heavy equipment/trucking market.
International sales increased to $6.0 million or 25% of net sales for 1997
compared to $3.2 million or 24% of net sales in 1996. The majority of
international sales are in Europe, including $3.4 million in 1997 and $2.1
million in 1996. The Company believes that international sales as a percentage
of total net sales will continue at levels similar to those in 1997, with little
impact on the Company's results of operations or liquidity.
The Company expects continued sales growth as a result of expansion in all
key vertical markets and new product offerings. In addition to sales increases
in the 5000 Series and 7000 Series products, the Company is in the process of
developing the 2000 Series line of mobile embedded servers. Management believes
that this will position the Company not only as a supplier of service tools and
platforms, but also will allow the Company to enter the emerging vehicle
on-board server market in such applications as transportation, utilities,
government/military and law enforcement. It is anticipated that shipments of the
2000 Series will begin in mid to late 1998. The Company plans to continue to
expand its product lines in the future to offer a wide array of product
platforms to serve applications within its key strategic markets.
Delays in the introduction of new products or market acceptance of these
products could reduce the anticipated growth of the Company's sales.
Additionally, due to the potential long customer sales cycle, there is the
possibility of erratic revenue growth.
Gross Profit. Gross profit increased 75% from $4.8 million in 1996 to $8.4
million in 1997. As a percentage of net sales, gross profit margins decreased
from 37% to 35%. The introduction in the second half of 1996 of the 5000 Series,
which carries lower pricing and profit margins, and the introduction of a new
lower base price 7000 Series model in the fourth quarter of 1996, were the
significant causes for the reduced margins as a percent of net sales. With
improvements in manufacturing efficiencies, specifically due to enhanced
manufacturing processes at the Company's new manufacturing facility, outsourcing
of several key assembly components, and unit volume increases, the Company
believes it will increase gross profit margins to the high 30% range by late
1998.
Sales and Marketing. Sales and marketing expenses include salaries, sales
commissions, travel and related expenses for the Company's marketing, sales and
technical support personnel. These expenses also include programs aimed at
increasing revenues, such as advertising and trade shows, as well as various
sales and promotional programs designed for specific vertical markets. Sales and
marketing expenses were $4.3 million in 1997, an increase of $1.0 million or 32%
compared to 1996. The increased expenses were primarily due to an expansion in
the Company's direct sales force and sales commissions. As a percentage of net
sales, sales and marketing expenses declined from 25% in 1996 to 18% in 1997.
The Company expects to continue to invest in the promotion and marketing of its
products, to expand its vertical marketing strategy and enhance its competitive
position. Accordingly, increases in sales and marketing expenditures are
anticipated in future periods, although expenses are projected to remain
relatively consistent as a percentage of net sales.
14
<PAGE>
General and Administrative. General and administrative expenses include the
Company's finance, human resources, contracts and other administrative
management operations. These expenses increased from $2.2 million or 17% of net
sales in 1996 to $3.0 million or 12% of net sales in 1997. The increase was
attributable to additional compensation expenses as the Company expanded its
executive management team to support the growth of the Company. In addition,
increased facilities expenses were incurred as the Company signed a lease for a
new, larger facility and moved its office personnel during the fourth quarter of
1997. The production operations moved into the new facility during first quarter
of 1998. The Company has subleased its prior facility through the lease
expiration date in June 1999. The Company anticipates holding the growth of
general and administrative expenses to a level less than the growth of sales in
the future.
Research and Development. Research and development expenses are incurred in the
development and testing of new or enhanced products and customized computing
platforms for special applications. These costs are expensed as incurred. These
expenses remained consistent at $1.9 million in 1997 and 1996, with an increase
in salaries and related expenses in 1997 offset by a reduction in product
development material costs. During 1996, a significant investment in material
costs was made relating to the introduction of the 5000 Series. Research and
development expenses decreased as a percentage of net sales from 14% in 1996 to
8% in 1997. The Company expects these expenses to increase for the foreseeable
future as it expands its technical resources to develop new products and enhance
existing product lines. As a percentage of net sales, research and development
expenses are expected to remain stable or increase moderately.
Interest Expense and Other, Net. Interest expense, net of interest income,
decreased from $356,000 in 1996 to $258,000 in 1997. Proceeds from the initial
public offering were used to repay debt in March and April 1997, with interest
income earned on the remaining proceeds from the offering. The Company expects
to continue reporting net interest income for the foreseeable future.
COMPARISON OF YEARS ENDED
JANUARY 5, 1997 AND DECEMBER 31, 1995
Net Sales. The Company's net sales increased 59% from $8.2 million in 1995 to
$13.1 million for 1996. Of the increase in net sales, $4.4 million was due to an
increase in the number of units sold. International sales decreased from 35% of
net sales for 1995 to 24% of net sales for 1996 as a result of the Company's
focus on building its domestic sales force and testing to demonstrate continued
compliance with European EMI standards.
Gross Profit. Gross profit increased 45% from $3.3 million in 1995 to $4.8
million in 1996. As a percentage of net sales, gross profit decreased from 40%
in 1995 to 37% in 1996. In 1995 the Company incurred $0.3 million, or 4% of net
sales, in inventory disposal costs related to upgrading computer components due
to technological advances. This compared to $0.8 million or 6% of net sales, in
1996.
Sales and Marketing. Sales and marketing expenses increased from $1.5 million or
18% of net sales for 1995 to $3.2 million or 25% of net sales for 1996. The
increase was primarily related to advertising, staffing and promotion expenses
to build general product recognition and introduce the 5000 Series.
General and Administrative. General and administrative expenses increased from
$1.2 million or 14% of net sales for 1995 to $2.2 million or 17% of net sales
for 1996. The increase was due to staffing, legal fees, professional services
and facilities expenses.
Research and Development. The Company incurred research and development expenses
of $1.9 million or 14% of net sales in 1996 as compared to $0.9 million or 12%
of net sales in 1995. The increase in research and development expenses was
primarily due to significant investment in the introduction of the 5000 Series
and also continued development of the 7000 Series.
15
<PAGE>
Interest Expense and Other, Net. Interest expense increased from $69,000 for
1995 to $356,000 for 1996 primarily due to higher levels of indebtedness
including the Company's terminated bank line of credit, loans from affiliated
parties and bridge notes, all of which funded working capital requirements.
Liquidity and Capital Resources. From inception to March 1997, the Company
primarily financed its operations and capital expenditures through the private
sale of equity and debt securities, loans and bank lines of credit. In the first
quarter of 1997, the Company completed an initial public offering of common
stock and received net proceeds of $11.8 million from the sale of 2,125,000
shares. From the proceeds, the Company repaid $6.4 million of loans during 1997.
There were no loans outstanding or bank credit facilities open as of January 4,
1998.
The Company's cash balance as of January 4, 1998 was $3.2 million as compared
to the January 5, 1997 balance of $2.1 million. Cash used for operating
activities totaled $3.7 million in 1997 and $5.4 million in 1996. The Company's
accounts receivable increased from $2.0 million at January 5, 1997 to $6.4
million at January 4, 1998, primarily due to increased sales in the fourth
quarter of 1997. Inventories increased $0.6 million to $5.0 million at the end
of 1997. This was mainly due to increases in raw materials and purchased parts
to support the increased business volume. Accrued liabilities increased $0.9
million to $1.8 million in 1997. This is attributed to an increase in accrued
warranty and deferred revenue relating to increased sales of products and
extended warranties.
In 1997, the Company purchased $0.9 million of property, plant and equipment.
The expenditures primarily related to computers, equipment, furniture and
fixtures for the new facility as well as information system upgrades and
manufacturing tooling expenditures. The Company anticipates property, plant and
equipment expenditures relating to tooling to increase in the future as it
expands its product offerings.
As of the date of this annual report, the Company has requested proposals
relating to a line of credit to supplement cash availability and plans to have a
facility in place during the second quarter of 1998. The Company believes that
this planned line of credit, together with existing cash, interest expected to
be earned thereon, anticipated operating cash flows, and any other potential
financing to be sought through borrowings or other arrangements, will be
sufficient to fund its operations at least through fiscal 1998. Cash
requirements for periods during and beyond the next twelve months depend on the
Company's profitability, its ability to manage working capital requirements and
its rate of growth, among other factors.
Year 2000. The Company's internal information systems were upgraded during the
first quarter of 1998 to ensure year 2000 compliance. The total cost of the
implementation was not significant. Management believes its current products are
year 2000 compliant. Although the Company believes it is under no obligation,
the Company is assessing the impact of potential modifications to units sold in
prior periods. The Company believes that any associated costs will not have a
material impact on the Company's results of operations. The Company's operations
with respect to the year 2000 may also be affected by other entities with which
the Company transacts business. The Company is currently unable to determine the
potential consequences, if any, that could result from such entities' failure to
effectively address this issue.
Recent Accounting Pronouncement. The Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) effective in
the quarter and year ended January 4, 1998. SFAS No. 128 establishes accounting
standards for computing and presenting earnings (loss) per share (EPS). Basic
EPS is computed by dividing net income by the weighted average number of shares
of common stock outstanding during the period. No dilution for potentially
dilutive securities is included. Diluted EPS is calculated using the treasury
stock method and reflects the dilutive effect of outstanding options, warrants
and other securities. In the Company's calculations, the impact of common stock
equivalents has been excluded from the computation of weighted average common
shares outstanding as the effect would be antidilutive. As a result, basic and
diluted EPS are equal for all periods presented in this annual report.
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 4, 1998 January 5, 1997
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,218,759 $2,132,089
Accounts receivable, net of allowance for
doubtful accounts of $384,600 and $201,400 6,402,023 2,008,693
Inventories 5,009,137 4,417,322
Note receivable from related party -- 92,175
Prepaid expenses and other 186,298 418,189
----------- ----------
Total current assets 14,816,217 9,068,468
----------- ----------
Property and Equipment:
Computers and equipment 1,628,949 1,125,379
Furniture and fixtures 378,821 125,374
Leasehold improvements 184,446 98,585
Less: Accumulated depreciation (913,918) (553,178)
----------- ----------
Property and equipment, net 1,278,298 796,160
Deposits and Other Assets, net 25,555 41,491
----------- ----------
$16,120,070 $9,906,119
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ -- $4,675,838
Notes payable to related parties (Note 4) -- 1,350,000
Accounts payable 1,489,982 1,111,526
Accrued compensation and benefits 410,758 264,035
Other accrued liabilities 1,350,610 567,201
Current maturities of capitalized lease obligations 47,409 57,411
----------- ----------
Total current liabilities 3,298,759 8,026,011
Capitalized Lease Obligations, less current maturities 22,693 66,722
----------- ----------
Total liabilities 3,321,452 8,092,733
----------- ----------
Commitments and Contingencies (Note 8)
Shareholders' Equity:
Series A convertible preferred stock, $.001 par value,
300,000 shares authorized, issued and outstanding
at January 5, 1997 -- 300
Common stock, $.001 par value, 30,000,000
and 15,000,000 shares authorized;
8,725,426 and 5,880,736 issued and outstanding 8,725 5,881
Common stock warrants 150,640 231,985
Additional paid-in capital 19,966,602 7,878,591
Accumulated deficit (7,327,349) (6,303,371)
----------- ----------
Total shareholders' equity 12,798,618 1,813,386
----------- ----------
$16,120,070 $9,906,119
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
17
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended January 4, 1998 January 5, 1997 December 31, 1995
<S> <C> <C> <C>
Net Sales $23,815,045 $13,111,077 $8,241,791
Cost of Sales 15,394,663 8,310,933 4,979,504
----------- ----------- ----------
Gross profit 8,420,382 4,800,144 3,262,287
----------- ----------- ----------
Operating Expenses:
Sales and marketing 4,268,001 3,234,692 1,523,648
General and administrative 3,034,670 2,232,040 1,168,626
Research and development 1,884,128 1,896,448 948,406
----------- ----------- ----------
Total operating expenses 9,186,799 7,363,180 3,640,680
----------- ----------- ----------
Operating loss (766,417) (2,563,036) (378,393)
Interest Expense and Other, net (257,561) (356,328) (68,678)
----------- ----------- ----------
Net Loss from Continuing Operations (1,023,978) (2,919,364) (447,071)
Loss from Discontinued Operation (Note 1) -- (376,682) (179,848)
----------- ----------- ----------
Net Loss $(1,023,978) $(3,296,046) $ (626,919)
=========== =========== ==========
Basic and Diluted Loss Per Share:
Net loss per common share from continuing operations $ (.12) $ (.45) $ (.07)
Loss per common share from discontinued operation -- (.06) (.03)
----------- ----------- ----------
Net loss per common share $ (.12) $ (.51) $ (.10)
=========== =========== ==========
Weighted average common shares outstanding 8,242,434 6,442,193 6,131,094
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Stock Common Stock Common Additional Total Share-
----------------- ------------------ Stock Paid-in Accumulated holders'
Shares Amount Shares Amount Warrants Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 -- $ -- 5,329,100 $5,329 $ 81,435 $ 3,721,471 $(2,172,733) $ 1,635,502
Issuance of common stock,
net of offering costs
of $111,750 -- -- 354,334 355 -- 950,895 -- 951,250
Exercise of stock options -- -- 31,334 31 -- 31,971 -- 32,002
Issuance of common
stock warrants -- -- -- -- 33,750 -- -- 33,750
Exercise of warrants -- -- 100,000 100 -- 99,900 -- 100,000
Merger with Paragon (Note 1) -- -- 25,300 25 -- 12,025 (5,491) 6,559
Net loss -- -- -- -- -- -- (626,919) (626,919)
-------- ------ ---------- ------ --------- ---------- ---------- ----------
Balance, December 31, 1995 -- -- 5,840,068 5,840 115,185 4,816,262 (2,805,143) 2,132,144
Issuance of preferred stock 300,000 300 -- -- -- 2,999,700 -- 3,000,000
Exercise of stock options -- -- 40,668 41 -- 62,629 -- 62,670
Issuance of common
stock warrants -- -- -- -- 116,800 -- -- 116,800
Spin-off of Paragon (Note 1) -- -- -- -- -- -- (202,182) (202,182)
Net loss -- -- -- -- -- -- (3,296,046) (3,296,046)
-------------------------------------------------------------------------------------------------------
Balance, January 5, 1997 300,000 300 5,880,736 5,881 231,985 7,878,591 (6,303,371) 1,813,386
Issuance of common stock,
net of offering costs
of $2,042,200 -- -- 2,125,000 2,125 -- 11,768,207 -- 11,770,332
Conversion of
preferred stock (300,000) (300) 576,923 577 -- (277) -- --
Exercise of stock options -- -- 61,422 61 -- 157,472 -- 157,533
Exercise of common
stock warrants -- -- 81,345 81 (81,345) 162,609 -- 81,345
Net loss -- -- -- -- -- -- (1,023,978) (1,023,978)
-------------------------------------------------------------------------------------------------------
Balance, January 4, 1998 -- $ -- 8,725,426 $8,725 $150,640 $19,966,602 $(7,327,349) $12,798,618
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
-----------------------------------------------------------
January 4, 1998 January 5, 1997 December 31, 1995
<S> <C> <C> <C>
Operating Activities:
Net loss $ (1,023,978) $(3,296,046) $ (626,919)
Adjustments to reconcile net loss to net cash
used for operating activities-
Depreciation and amortization 747,717 373,662 183,336
Change in operating items:
Accounts receivable (4,393,330) (120,765) (1,174,941)
Inventories (591,815) (2,596,021) (121,476)
Prepaid expenses and other 236,117 (348,991) (12,039)
Net assets of discontinued operation -- (163,931) --
Accounts payable 378,456 211,599 (44,320)
Accrued expenses 930,132 558,208 83,302
------------ ------------ -------------
Net cash used for operating activities (3,716,701) (5,382,285) (1,713,057)
------------ ------------ -------------
Investing Activities:
Purchase of property and equipment (886,829) (556,120) (251,409)
Loan to related party 92,175 (92,175) --
------------ ------------ -------------
Net cash used for investing activities (794,654) (648,295) (251,409)
------------ ------------ -------------
Financing Activities:
Proceeds from issuance of common stock 12,009,210 162,670 1,616,354
Proceeds from issuance of preferred stock -- 3,000,000 --
Net line of credit borrowings (repayments) -- (1,160,000) 670,000
Net proceeds from notes payable -- 4,735,952 --
Proceeds from notes payable to related parties -- 2,890,000 10,341
Payment of notes payable (5,000,000) -- --
Payment of notes payable to related parties (1,350,000) (1,540,000) (300,000)
Payment of capitalized lease obligations (61,185) (38,555) (17,670)
------------ ------------ -------------
Net cash provided by financing activities 5,598,025 8,050,067 1,979,025
------------ ------------ -------------
Increase In Cash and Cash Equivalents 1,086,670 2,019,487 14,559
Cash and Cash Equivalents, beginning of year 2,132,089 112,602 125,883
------------ ------------ -------------
Cash and Cash Equivalents, end of year $ 3,218,759 $ 2,132,089 $ 140,442
============ ============ =============
Supplemental cash flow disclosure:
Cash paid for interest $ 266,858 $ 214,601 $ 86,292
============ ============ =============
Noncash investing and financing activities:
Notes receivable from sale of common stock $ -- $ -- $ 100,000
============ ============ =============
Property and equipment acquired under capital leases $ 7,154 $ 68,558 $ 99,409
============ ============ =============
Issuance of warrants $ -- $ 116,800 $ 33,750
============ ============ =============
Net assets acquired/disposed of relating to Paragon (Note 1) $ -- $ 202,182 $ 6,559
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Operating Activities. FieldWorks, Incorporated (FieldWorks or the Company), a
Minnesota corporation, was organized on October 2, 1992 and was in the
development stage until significant revenue-generating activities commenced in
1994. FieldWorks is engaged in the design, development, manufacturing, marketing
and support of customer-specific computing solutions for demanding field
environments. The Company has integrated certain field instrumentation platforms
with state-of-the-art computer technology to produce a new class of portable
instrumentation equipment capable of simultaneously supporting many types of
diagnostic communication and computing capabilities required by the field
professions. The Company's products are expandable through multiple expansion
slots that can integrate a user's application-specific, multi-media and
communications needs into one portable, rugged device. The products have been
designed with a modular system configuration that allows a user to easily
upgrade the central processing unit or any other technological components
without purchasing a new computer. Additionally, the Company has the ability to
customize its computing platforms to meet the unique needs of its customers.
FieldWorks markets its products worldwide through a direct sales force,
independent sales representatives and distributors, original equipment
manufacturers, value-added-resellers and system integrators.
The Company's future operations are dependent upon the attainment of
certain objectives, including the continued successful development, marketing
and sale of its products and the continued design and implementation of new
technology. After products have been successfully introduced, additional time
may be necessary before continuing profitability on those products is achieved.
Merger With Paragon Technology, Incorporated and Subsequent Distribution. In
August 1995, FieldWorks completed a merger agreement with Paragon Technology,
Incorporated (Paragon), a Pennsylvania company engaged in software research and
development. The merger was effected through a share-for-share exchange of
25,300 shares of FieldWorks' common stock for all of the outstanding shares of
Paragon common stock. The merger was accounted for as a pooling of interests
and, accordingly, the accompanying consolidated financial statements reflect the
combined activities of FieldWorks and Paragon (collectively, the Company) for
the entire 1995 fiscal year.
On November 11, 1996, the Company's board of directors approved the
distribution of all of the issued and outstanding common stock of Paragon, as a
dividend to Company shareholders of record as of November 15, 1996. All shares
of Paragon stock were distributed prior to January 5, 1997. At January 5, 1997,
the Company had a note receivable from Paragon of $92,175. This note was repaid
in full on February 5, 1997.
Paragon's results of operations for 1996 and 1995 have been presented as a
discontinued operation in the accompanying statements of operations. Revenues
applicable to Paragon were approximately $183,000 and $274,000 for the period
from January 1, 1996 to November 15, 1996 and for the year ended December 31,
1995, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year. Effective in fiscal 1996, the Company changed to a 52/53-week
fiscal year. Fiscal years subsequent to 1996 will end on the Sunday closest to
December 31st. All references herein to "1997," "1996" and "1995" represent the
52-week fiscal year ended January 4, 1998, the 53-week fiscal year ended January
5, 1997 and the year ended December 31, 1995, respectively. The Company does not
believe that this change affects comparability of the financial statements.
21
<PAGE>
Principles of Consolidation. The consolidated financial statements of the
Company include the accounts of the Company and its wholly owned subsidiary. All
intercompany accounts and transactions have been eliminated in consolidation.
Earnings (Loss) Per Common Share. The Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) effective in
the quarter and year ended January 4, 1998. SFAS No. 128 establishes accounting
standards for computing and presenting earnings (loss) per share (EPS). Basic
EPS is computed by dividing net income by the weighted average number of shares
of common stock outstanding during the period. No dilution for potentially
dilutive securities is included. Diluted EPS is calculated using the treasury
stock method and reflects the dilutive effect of outstanding options, warrants
and other securities. In the Company's calculations, the impact of common stock
equivalents has been excluded from the computation of weighted average common
shares outstanding as the effect would be antidilutive. As a result, basic and
diluted EPS are equal for all periods presented in the accompanying Statements
of Operations.
As a result of the adoption of SFAS No. 128 and related Securities and
Exchange Commission rules, the Company's reported EPS amounts have been restated
as follows:
1996 1995
- --------------------------------------------------------------------------------
Primary loss per share as reported $.50 $.10
Effect of SFAS No. 128 .01 --
---- ----
Basic loss per share as restated $.51 $.10
==== ====
Fully diluted loss per share as reported $ -- $ --
Effect of SFAS No. 128 .51 .10
---- ----
Diluted loss per share as restated $.51 $.10
==== ====
Cash and Cash Equivalents. Cash consists of amounts held in the Company's
checking accounts and money market funds with original maturities of 90 days or
less. The carrying value approximates fair value due to the short
maturity of the instruments.
Inventories. Inventories are stated at the lower of cost or market value, as
determined by the first-in, first-out cost method, and consisted of the
following:
January 4, 1998 January 5, 1997
- --------------------------------------------------------------------------------
Raw materials $3,268,558 $2,772,219
Work in process 859,172 1,066,189
Finished goods 881,407 578,914
---------- ----------
Total $5,009,137 $4,417,322
========== ==========
Property and Equipment. Property and equipment are recorded at cost. Repair and
maintenance costs which do not significantly extend the lives of the respective
assets are charged to expense as incurred. Depreciation is computed using the
straight-line method over the related assets' useful lives, ranging from three
to seven years.
Warranties. The Company provides a one-year warranty from the date of sale.
Estimated warranty costs are accrued in the same period in which the related
revenue is recognized, based on anticipated parts and labor costs utilizing
historical experience. Ultimate warranty costs may differ from such estimates.
22
<PAGE>
Other Accrued Liabilities. The Company's other accrued liabilities as shown in
the consolidated balance sheets included the following:
January 4, 1998 January 5, 1997
- --------------------------------------------------------------------------------
Deferred revenue $ 563,095 $ 15,939
Accrued warranty 332,053 174,521
Accrued returns and allowances 206,356 36,891
Other 249,106 339,850
---------- --------
Total $1,350,610 $567,201
========== ========
Revenue Recognition. The Company recognizes product revenue, net of estimated
returns, at the time the products are shipped. Revenue for services performed is
recognized as earned. Revenues related to extended warranties sold to customers
are recorded as deferred revenue and recognized over the periods covered by the
extended warranties.
Significant Customers and Export Sales. For the year ended January 4, 1998,
sales to one customer represented 13% of net sales. For the years ended January
5, 1997 and December 31, 1995, there were no customers representing over 10% of
net sales.
Export sales by major region were as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Europe $3,396,000 $2,087,000 $1,925,000
Americas 1,875,000 342,000 292,000
Middle East/Africa 183,000 299,000 137,000
Asia 416,000 158,000 249,000
Australia 93,000 154,000 178,000
Russia -- 152,000 70,000
---------- ---------- ----------
$5,963,000 $3,192,000 $2,851,000
========== ========== ==========
Research and Development Costs. Research and development costs are charged to
expense as incurred.
Concentrations of Credit Risk. The Company's exposure to concentrations of
credit risk relates primarily to trade receivables. Such exposure is limited due
to the large number of customers and their dispersion across many industries and
geographies. The Company controls credit risk by performing credit evaluations
for all new customers and requires letters of credit, bank guarantees and
advance payments, if deemed necessary. Through 1997, bad debt write-offs have
not been material.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the periods presented. Ultimate results could differ from those
estimates.
23
<PAGE>
3. INCOME TAXES
The Company accounts for income taxes under the liability method, which requires
recognition of deferred income tax assets and liabilities for the expected
future income tax consequences under enacted tax laws of temporary differences
between the financial reporting and tax bases of assets and liabilities.
A reconciliation of the Company's statutory tax rate to the effective rate
is as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Federal statutory rate 34% 34% 34%
State taxes, net of federal tax benefit 4 6 6
Valuation allowance (38) (40) (40)
--- --- ---
--% --% --%
=== === ===
As of January 4, 1998, the Company had approximately $4,400,000 of net
operating loss carryforwards for federal income tax purposes that are available
to offset future taxable income through the year 2012. Certain restrictions
caused by the change in ownership resulting from sales of stock will limit
annual utilization of the net operating loss carryforwards.
The components of the Company's deferred tax asset are as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Net operating loss carryforwards $ 2,719,000 $ 1,760,000 $ 877,000
Deductible differences 1,434,000 448,000 260,000
Valuation allowance (4,153,000) (2,208,000) (1,137,000)
------------ ------------ -------------
$ -- $ -- $ --
============ ============ =============
4. LINE OF CREDIT AND NOTES PAYABLE
Line of Credit. In December 1995, the Company entered into a revolving
line-of-credit agreement, with borrowing capacity of $1,500,000, limited to a
borrowing base, as defined in the agreement. The credit facility was
collateralized by substantially all assets of the Company and was personally
guaranteed by a shareholder of the Company. In March 1996, the line was extended
through April 1997 and its borrowing limit increased to $2,000,000. The
incremental borrowing capacity of $500,000 was personally guaranteed by a
shareholder of the Company. In December 1996, the Company repaid all amounts
owed under the line with bridge financing proceeds received in December 1996 and
terminated the agreement. The maximum amount outstanding during 1996 under this
line was $2,000,000 and average borrowings for the year were $1,652,000. The
weighted average interest rate during 1996 was 9.77%.
Notes Payable. During December 1996, the Company raised approximately $4,684,000
through a private debt offering, net of $316,000 in offering costs. In
connection with the notes, the Company issued five-year warrants for the
purchase of 250,000 shares of common stock at an exercise price of $5.20. These
notes were repaid in April 1997.
In May through September 1996, the Company entered into certain unsecured
short-term financing agreements with related and other parties, for a total of
$2,890,000. Outstanding borrowings under these agreements were $1,350,000 at
January 5, 1997 and were repaid in March 1997.
24
<PAGE>
5. SHAREHOLDERS' EQUITY
In March 1997, the Company completed an initial public offering (IPO) of
2,125,000 shares of common stock with proceeds of approximately $11.8 million,
net of related offering costs. The Company used $6.4 million of the proceeds to
repay bridge financing arrangements (see Note 4) and the remaining proceeds will
continue to be used to fund capital expenditures and for working capital
purposes. In connection with the IPO, the Company granted warrants for the
purchase of 212,500 shares to the underwriter. These warrants have an exercise
price of $7.80 and expire in March 2002. At the completion of the IPO, the
Company's articles of incorporation were amended to authorize 30 million shares
of common stock, $.001 par value, and five million shares of undesignated
preferred stock, $.001 par value.
In July 1996, the Company sold 300,000 shares of Series A, $.001 par value
convertible preferred stock (Preferred Stock) at $10 per share. The Preferred
Stock was automatically converted into common stock upon consummation of the
initial public offering at a rate of $5.20. The holder of the preferred stock
was also granted warrants to purchase 46,154 shares of the Company's common
stock at an exercise price of $5.20 per share.The warrants are exercisable
through July 2001. In December 1994, the Company completed a private placement
(1994 Placement) of 479,100 shares of common stock at $3 per share, receiving
proceeds of $1,437,300. In 1995, the Company extended the 1994 Placement to
allow for issuance of an additional 354,334 shares of common stock at $3 per
share.
6. WARRANTS
Warrants to purchase 913,399 and 600,899 shares of the Company's common stock
were outstanding at January 4, 1998 and January 5, 1997. The warrants are
exercisable at prices ranging from $3 to $7.80 and are exercisable at various
times through March 2002.
In March 1997, warrants for the purchase of 81,345 shares at $1 per share
were exercised.
7. STOCK OPTION AND 401(K) PLANS
Stock Option Plans. In June 1994, the Company adopted a Long-Term Incentive and
Stock Option Plan (the Plan). Under the Plan, options are granted at an exercise
price equal to the fair market value of the common stock at the date of grant.
Incentive stock options are granted to employees, and vest over varying periods
not to exceed ten years. As of January 4, 1998, the Plan is authorized to issue
up to 1,500,000 shares of common stock for such options. At January 4, 1998 and
January 5, 1997, 124,476 and 249,598 shares were available for future grants.
In December 1996, the Company's board of directors approved the Non-Employee
Directors' Stock Option Plan (the Directors' Plan), which was approved at a
shareholder meeting held on January 20, 1997. Under the Directors' Plan, each
non-employee director will receive 25,000 nonqualified options upon election and
10,000 options at each reelection date. The Directors' Plan authorizes the
issuance of up to 300,000 shares of common stock for these options. At January
4, 1998, 245,000 shares were available for future grants.
25
<PAGE>
Shares subject to option are summarized as follows:
<TABLE>
<CAPTION>
Incentive Weighted average Non-qualified Weighted average
stock options exercise price stock options exercise price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 258,000 $1.11 80,000 $1.00
Options granted 123,000 2.99 20,000 3.00
Options canceled (6,666) 2.25 -- --
Options exercised (31,334) 1.02 -- --
---------- ------ -------- ------
Balance, December 31, 1995 343,000 1.77 100,000 1.40
Options granted 320,900 5.25 57,500 5.00
Options canceled (2,332) 3.57 -- --
Options exercised (5,668) 1.35 (35,000) 1.57
---------- ------ -------- ------
Balance, January 5, 1997 655,900 3.47 122,500 3.04
Options granted 449,800 5.33 181,000 6.07
Options canceled (50,678) 5.40 -- --
Options exercised (31,422) 3.36 (30,000) 1.00
---------- ------ -------- ------
Balance, January 4, 1998 1,023,600 $4.19 273,500 $5.27
========== ====== ======== ======
Options exercisable at:
December 31, 1995 199,450 $1.48 86,800 $1.16
======= ===== ======= =====
January 5, 1997 471,103 $2.92 81,217 $2.13
======= ===== ======= =====
January 4, 1998 536,683 $3.22 162,678 $4.82
======= ===== ======= =====
</TABLE>
Additional information regarding options outstanding at January 4, 1998 is
as follows:
<TABLE>
<CAPTION>
Weighted average
Number of Exercise Weighted average remaining
Type of option options price range exercise price contractual life
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Incentive 343,000 $1.00-$5.00 $1.94 2.0 years
Incentive 680,600 $5.00-$7.00 5.33 5.9 years
---------
1,023,600
=========
Nonqualified 35,000 $1.00-$5.00 $1.57 6.6 years
Nonqualified 238,500 $5.00-$7.00 5.81 9.1 years
---------
273,500
=========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock option plans. Accordingly, no compensation cost has been recognized in
the accompanying statements of operations. Had compensation cost been recognized
based on the fair values of options at the grant dates consistent with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and net loss per common share would have been increased to
the following pro forma amounts:
1997 1996 1995
- --------------------------------------------------------------------------------
Net loss
As reported $1,023,978 $3,296,046 $626,919
Pro forma 2,083,978 4,156,046 736,919
Net loss per common share
As reported $ .12 $ .51 $ .10
Pro forma .25 .65 .12
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
26
<PAGE>
The weighted average fair values of options granted were as follows:
Incentive Nonqualified
stock options stock options
- --------------------------------------------------------------------------------
1997 grants $3.47 $4.43
1996 grants 3.87 4.46
1995 grants 2.20 2.67
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995:
1997 1996 1995
- --------------------------------------------------------------------------------
Risk-free interest rate 6.35% 6.59% 6.39%
Expected life of incentive options 5 years 5 years 5 years
Expected life of nonqualified options 7 years 10 years 10 years
Expected volatility 72% 90% 90%
Expected dividend yield -- -- --
401(k) Profit-Sharing Plan. Effective January 1, 1996, the Company adopted a
401(k) profit-sharing plan (the 401(k) Plan) covering substantially all
full-time employees. Eligible employees may elect to defer up to 15% of their
eligible compensation. The Company may make discretionary matching contributions
of up to 6% of each plan participant's eligible compensation. Through January 4,
1998, the Company had not made any matching contributions to the 401(k) Plan.
8. COMMITMENTS AND CONTINGENCIES
Leases. The Company leases its current manufacturing and office facility under
an operating lease which expires September 30, 2004. The Company leased its
previous facility under an operating lease which expires in June 30, 1999. This
facility has been subleased for the remaining period under lease. Total
additional rentals to be received in future years are approximately $308,000,
which approximates the Company's obligation under this lease. The Company also
leases equipment under capital leases which expire at various dates through
November 2000. Property and equipment under capital leases at January 4, 1998
totaled $176,900.
The following is a schedule of future minimum lease payments as of January
4, 1998:
Capital leases Operating leases
- --------------------------------------------------------------------------------
1998 $ 53,718 $696,000
1999 15,418 608,000
2000 7,750 505,000
2001 -- 462,500
2002 -- 482,500
Thereafter -- 924,000
--------
Total minimum capital lease payments 76,886
Less-
Amount representing interest (6,784)
Current maturities (47,409)
--------
Noncurrent portion of minimum capital lease payments $ 22,693
========
Legal Proceedings. The Company is involved in legal actions in the ordinary
course of its business. Although the outcome of any such legal actions cannot be
predicted, management believes that there is no pending legal proceeding against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the Company's financial position, results of operations or
cash flows.
27
<PAGE>
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ----------------- ------------------ -----------------
(in thousands) 1997 1996 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $5,117 $2,830 $5,513 $3,066 $6,012 $3,702 $7,173 $ 3,513
Gross profit 1,883 1,095 1,943 1,226 2,204 1,433 2,390 1,046
Net income (loss) from
continuing operations (698) (455) (305) (530) (53) (597) 32 (1,337)
Loss from discontinued
operation/(1)/ -- (70) -- (137) -- (140) -- (30)
------- ------- ------- ------- -------- ------- -------- -------
Net income (loss) $ (698) $ (525) $ (305) $ (667) $ (53) $ (737) $ 32 $(1,367)
======= ======= ======= ======= ======== ======= ======== =======
Basic and diluted loss
per common share:
Net loss per common share
from continuing operations $ (.10) $ (.07) $ (.04) $ (.08) $ (.01) $ (.09) $ -- $ (.20)
Loss per common share from
discontinued operation/(1)/ -- (.01) -- (.02) -- (.02) -- (.01)
------- ------- ------- ------- -------- ------- -------- -------
Net loss per common share $ (.10) $ (.08) $ (.04) $ (.10) $ (.01) $ (.11) $ -- $ (.21)
======= ======= ======= ======= ======== ======= ======== =======
Price range of common stock/(2)/:
High 6 1/4 -- 5 5/8 -- 6 1/2 -- 7 3/4 --
Low 4 3/4 -- 3 11/32 -- 4 1/16 -- 5 --
</TABLE>
(1) In November 1996, the Company's Board of Directors approved the distribution
of all of the issued and outstanding shares of the common stock of the Company's
wholly-owned subsidiary, Paragon, as a dividend to shareholders of record of the
Company as of November 15, 1996. Paragon's results of operations for the year
ended January 5, 1997, as well as the estimated loss from disposition, have been
presented as a discontinued operation in the above Quarterly Financial Data.
(2) FieldWorks, Incorporated common stock is traded on the Nasdaq National
Market System under the symbol "FWRX." Price information is not applicable for
periods prior to the Company's initial public offering in March 1997.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FieldWorks, Incorporated: We have audited the accompanying consolidated
balance sheets of FieldWorks, Incorporated (a Minnesota corporation) and
Subsidiary as of January 4, 1998 and January 5, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended January 4, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FieldWorks, Incorporated and
Subsidiary as of January 4, 1998 and January 5, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
January 4, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 9, 1998
28
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K into the Company's previously
filed Registration Statement File No. 333-26297.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 3, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-START> JAN-06-1997
<PERIOD-END> JAN-04-1998
<CASH> 3,218,759
<SECURITIES> 0
<RECEIVABLES> 6,402,023
<ALLOWANCES> 0
<INVENTORY> 5,009,137
<CURRENT-ASSETS> 14,816,217
<PP&E> 2,192,216
<DEPRECIATION> 913,918
<TOTAL-ASSETS> 16,120,070
<CURRENT-LIABILITIES> 3,298,759
<BONDS> 0
0
0
<COMMON> 8,725
<OTHER-SE> 12,789,893
<TOTAL-LIABILITY-AND-EQUITY> 16,120,070
<SALES> 23,815,045
<TOTAL-REVENUES> 23,815,045
<CGS> 15,394,663
<TOTAL-COSTS> 15,394,663
<OTHER-EXPENSES> 1,884,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257,561
<INCOME-PRETAX> (1,023,978)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,023,978)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,023,978)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-START> JAN-06-1997
<PERIOD-END> OCT-05-1997
<CASH> 5,057,654
<SECURITIES> 0
<RECEIVABLES> 4,167,640
<ALLOWANCES> 0
<INVENTORY> 5,385,390
<CURRENT-ASSETS> 14,791,975
<PP&E> 1,740,958
<DEPRECIATION> 855,475
<TOTAL-ASSETS> 15,703,658
<CURRENT-LIABILITIES> 3,020,015
<BONDS> 0
0
0
<COMMON> 8,687
<OTHER-SE> 12,646,372
<TOTAL-LIABILITY-AND-EQUITY> 15,703,658
<SALES> 16,642,491
<TOTAL-REVENUES> 16,642,491
<CGS> 10,613,517
<TOTAL-COSTS> 10,613,517
<OTHER-EXPENSES> 1,382,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 319,658
<INCOME-PRETAX> (1,056,154)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,056,154)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,056,154)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-START> JAN-06-1997
<PERIOD-END> JUL-06-1997
<CASH> 5,805,975
<SECURITIES> 0
<RECEIVABLES> 2,959,650
<ALLOWANCES> 0
<INVENTORY> 5,105,900
<CURRENT-ASSETS> 14,092,101
<PP&E> 1,486,833
<DEPRECIATION> 757,235
<TOTAL-ASSETS> 14,848,516
<CURRENT-LIABILITIES> 2,101,922
<BONDS> 0
0
0
<COMMON> 8,684
<OTHER-SE> 12,693,319
<TOTAL-LIABILITY-AND-EQUITY> 14,848,516
<SALES> 10,630,472
<TOTAL-REVENUES> 10,630,472
<CGS> 6,805,052
<TOTAL-COSTS> 6,805,052
<OTHER-EXPENSES> 833,150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 395,238
<INCOME-PRETAX> (1,003,210)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,003,210)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,003,210)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-START> JAN-06-1997
<PERIOD-END> APR-06-1997
<CASH> 11,586,900
<SECURITIES> 0
<RECEIVABLES> 3,070,977
<ALLOWANCES> 0
<INVENTORY> 5,979,680
<CURRENT-ASSETS> 20,937,305
<PP&E> 1,430,904
<DEPRECIATION> 658,936
<TOTAL-ASSETS> 21,736,736
<CURRENT-LIABILITIES> 8,661,000
<BONDS> 0
0
0
<COMMON> 8,684
<OTHER-SE> 12,998,603
<TOTAL-LIABILITY-AND-EQUITY> 21,736,736
<SALES> 5,117,168
<TOTAL-REVENUES> 5,117,168
<CGS> 3,234,523
<TOTAL-COSTS> 3,234,523
<OTHER-EXPENSES> 397,681
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 420,351
<INCOME-PRETAX> (697,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (697,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (697,926)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-05-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> JAN-05-1997
<CASH> 2,132,089
<SECURITIES> 0
<RECEIVABLES> 2,100,868
<ALLOWANCES> 201,400
<INVENTORY> 4,417,322
<CURRENT-ASSETS> 9,068,468
<PP&E> 796,160
<DEPRECIATION> 553,178
<TOTAL-ASSETS> 9,906,119
<CURRENT-LIABILITIES> 8,026,011
<BONDS> 0
0
300
<COMMON> 5,881
<OTHER-SE> 8,110,576
<TOTAL-LIABILITY-AND-EQUITY> 9,906,119
<SALES> 13,111,077
<TOTAL-REVENUES> 13,111,077
<CGS> 8,310,933
<TOTAL-COSTS> 7,363,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 356,328
<INCOME-PRETAX> (2,919,364)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,919,364)
<DISCONTINUED> (376,682)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,296,046)
<EPS-PRIMARY> (.51)
<EPS-DILUTED> (.51)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 112,602 334,648
<SECURITIES> 0 0
<RECEIVABLES> 1,887,928 2,968,539
<ALLOWANCES> 110,600 150,500
<INVENTORY> 1,821,301 4,355,616
<CURRENT-ASSETS> 4,050,188 8,153,155
<PP&E> 468,089 673,226
<DEPRECIATION> 251,655 454,000
<TOTAL-ASSETS> 4,559,229 8,950,546
<CURRENT-LIABILITIES> 2,365,199 5,233,482
<BONDS> 0 0
0 0
0 300
<COMMON> 5,840 5,881
<OTHER-SE> 4,931,447 8,035,576
<TOTAL-LIABILITY-AND-EQUITY> 4,559,229 8,950,546
<SALES> 8,241,791 9,597,772
<TOTAL-REVENUES> 8,241,791 9,597,772
<CGS> 4,979,504 5,966,978
<TOTAL-COSTS> 3,640,680 4,680,565
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 68,678 222,767
<INCOME-PRETAX> (447,071) (1,272,538)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (447,071) (1,272,538)
<DISCONTINUED> (179,848) (346,889)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (626,919) (1,619,427)
<EPS-PRIMARY> (.10) (.25)
<EPS-DILUTED> (.10) (.25)
</TABLE>
<PAGE>
Exhibit 99.1
CAUTIONARY STATEMENT
FieldWorks, Incorporated ("FieldWorks" or the "Company"), or persons acting
on behalf of the Company, or outside reviewers retained by the Company making
statements on behalf of the Company, or underwriters, from time to time, may
make, in writing or orally, "forward-looking statements" as defined under the
Private Securities Litigation Reform Act of 1995 (the "Act") and incorporated in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. This Cautionary Statement is for
the purpose of qualifying for the "safe harbor" provisions of the Act and is
intended to be a readily available written document that contains factors which
could cause results to differ materially from those projected in such
forward-looking statements. These factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to in
connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement shall be deemed to be a
statement that any one or more of the following factors may cause actual results
to differ materially from those which might be projected, forecast, estimated or
budgeted by the Company in such forward-looking statement or statements:
UNCERTAINTY OF MARKET ACCEPTANCE
The field force automation market for rugged computing platforms is a
relatively new, limited sector of the portable computer market. The Company's
success will depend upon increasing the market acceptance of its two current
series of products, which are both heavier and more expensive than most consumer
portable personal computers. There can be no assurance that the Company's
current or new products will gain widespread acceptance or that the Company will
generate sufficient sales to allow the Company to attain profitable operations.
In addition, the failure of the rugged computing platform market to expand would
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION
The Company believes that it currently occupies a niche in the portable
computer market with its rugged computing platforms. The Company currently faces
direct competition in this market niche from companies producing portable
computers intended for field use such as Dolch Computer Systems, Getac
Corporation, XL Computing Corporation (a subsidiary of Cycomm International,
Inc.), Itronix Corporation, Kontron Elektronik Corporation (a subsidiary of
Kontron Elektronik GmbH) and Panasonic Personal Computer Company. To the extent
FieldWorks and its direct competitors expand and develop this market niche,
other manufacturers may turn their attention to this niche and begin to produce
products directly competitive with those offered by the Company. The Company's
computing platforms also face indirect competition from a variety of different
companies and products, including consumer portable personal computers,
customized portable personal computers and single-purpose diagnostic and data
collection instruments.
Both the computer industry and the diagnostic and data collection
instrument industry are intensely competitive. Many of the companies that
produce or may produce devices that compete, directly or indirectly, with the
Company's products have substantially greater financial, technological and
marketing resources than the Company. Among other effects, increased competition
may require the Company to reduce the prices it charges for its products. There
can be no assurance that the Company will be able to compete effectively against
current or future competitors, or that such competitors will not succeed in
adapting more rapidly and effectively to changes in technology or in the market
or in developing or marketing products that will be more widely accepted.
<PAGE>
RISK OF TECHNOLOGICAL OBSOLESCENCE
Both the computer industry and the diagnostic and data collection
instrument industry are characterized by rapid technological change, including
changes in customer requirements, frequent new product introductions and
enhancements, and evolving industry standards. The Company's success will depend
in part on its ability to keep pace with technological developments and emerging
industry standards and to respond to customer requirements by enhancing its
current products and developing and introducing new products. Failure to
anticipate or respond rapidly to advances in technology and to adapt the
Company's products appropriately could have a material adverse effect on the
success of the Company's products and thus on the Company's business, financial
condition and results of operations. Similarly, failure to institute and
maintain effective policies intended to prevent the building of an inventory of
parts that have become obsolete will require the Company to write off portions
of such inventory as was done in 1997, 1996 and 1995. Any significant future
write-offs could have an adverse effect on the Company's financial condition.
Technological advances may also increase the level of competition in the rugged
computing platform market.
RISKS ASSOCIATED WITH MANAGING GROWTH
If the Company is to grow successfully, it must increase its manufacturing
output and capacity significantly. The anticipated growth of the Company's
operations will place significant strain not only on the manufacturing resources
of the Company, but also on the Company's management, sales and marketing,
operating and financial systems and resources. If such growth occurs, the
Company may encounter difficulties, including problems involving lower than
projected production rates, disrupted quality control and assurance, decreased
product reliability, increased manufacturing costs, difficulties in maintaining
internal-accounting controls, malfunctioning of existing and new equipment,
insufficient or untimely component supplies and shortages of personnel. There
can be no assurance that the Company will be able successfully to plan for or
manage increased production and marketing of its products. The failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has moved into expanded production and administrative
facilities in the fourth quarter of 1997 and first quarter of 1998. As a result
of moving its operations, the Company may encounter difficulties that could
impair the Company's operations, including, among others, cost overruns,
malfunctioning of new or moved equipment, production inefficiencies due to
facility design or lack of familiarity with the new facilities, disrupted
quality control. and assurance as a result of the move and resulting decreased
product reliability. Any such difficulties could have an adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH DEVELOPING SALES CHANNELS
The Company is engaged in building its sales organization and refining its
sales strategies. Failure to develop this sales organization sufficiently or to
implement appropriate sales strategies in a timely manner could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company distributes a substantial portion of its products through
independent sales representatives and distributors. The Company also sells its
products to original equipment manufacturers (OEMs), value-added-resellers
("VARs") and systems integrators. The success of the Company is dependent in
large part upon the performance of these resellers, many of whom may also carry
competitive products, and on its ability to attract new resellers. The Company
operates pursuant to written agreements, most of which may be terminated by the
reseller on 30 days' written notice with or without cause. The loss of the
Company's major resellers or a failure to make acceptable arrangements with
resellers in new markets could have a material adverse effect on the Company's
business, financial condition and results of operations.
<PAGE>
DEPENDENCE ON THIRD-PARTY MANUFACTURERS
Although the Company performs some mechanical subassembly and all final
assembly of its products, the Company relies on subcontract manufacturers to
produce a number of subassemblies. Utilization of subcontract manufacturers
results in dependence on the timely delivery of high quality products from these
manufacturers and may leave the Company with less flexibility and control over
the manufacturing process than if it conducted all of these operations
internally. There can be no assurance that the timely delivery of quality
subassemblies will not be interrupted. Any interruption in the timely supply of
quality subassemblies could have a material adverse effect on the Company's
ability to deliver its products until acceptable arrangements could be made with
a qualified alternative subassembly manufacturer. There can be no assurance that
the Company would be able to reach an arrangement with such a manufacturer at
acceptable prices and adequate quality levels on a timely basis. If the Company
were unable to do so, such an interruption could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON AVAILABILITY OF COMPONENTS
The Company's rugged computing platforms employ a number of components not
generally used in off-the-shelf personal computers, such as special hard disk
drives, CD-ROM drives, floppy disk drives, displays and power supplies. There
can be no assurance that such components will continue to be produced. Further,
a number of components contained in the Company's products are single sourced.
While the Company believes that there are other companies that could provide
these components, changing suppliers can create uncertainty and be costly and
time-consuming. In the event that the Company could not obtain adequate or
timely quantities of necessary components from its current suppliers, there can
be no assurance that the Company would be able to identify or access alternative
sources of such components within a reasonable period of time, on acceptable
terms, or at all. Some of the Company's current vendors use tools that have been
designed for and are the property of the Company. If the Company were required
to change suppliers for these components, it would need either to move the
necessary tools or to obtain new tools, either of which could entail significant
cost and delay. Moreover, the Company's buying power, may be limited by its
small size, and the Company may receive less favorable allocations and other
terms such as price, timing or other factors than larger companies buying from
the same suppliers. The unavailability of adequate quantities, the inability to
develop alternative sources, a reduction or interruption in supply or a
significant increase in the price of components could have a material adverse
effect on the Company's ability to manufacture and market its products.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results may vary significantly from quarter to
quarter due to such factors as long customer sales cycles, changes in customer
buying patterns, the timing of the introduction of new products by the Company
or its competitors, the tactics of the Company's competitors, technological
developments affecting the rugged computing platform market, and the overall
strength of the economy. The Company has experienced some fluctuations in the
orders for its products due to long sales cycles in connection with sales to
many of its customers, especially those that are government agencies or large
corporations, and also believes that such customers may place orders that are
disproportionate in size compared to the Company's other orders. Furthermore, a
decision by a customer to return a large order, or a decision by a customer to
return a smaller order that had been customized such that it could not easily be
resold, could have an adverse impact on the Company's results in any quarter.
All of these factors, along with the uncertainties associated with the
introduction of any new product or product enhancement, in gauging ultimate
customer demand, and in predicting general trends in the market for the
Company's products, may limit management's ability to plan for production and to
forecast quarterly results of operations accurately. The Company's operating
results for any particular quarter are not necessarily indicative of results
that the Company may achieve for any subsequent quarter or full year.
<PAGE>
DEPENDENCE ON INTELLECTUAL PROPERTY
The Company's success will depend in part on its ability to protect its
proprietary rights and to operate without infringing on the proprietary rights
of third parties. As of January 4, 1998 no patents have been issued to the
Company. The Company has filed two U.S. patent applications covering various
aspects of its 7000 Series Field Workstation laptop computing platforms and its
5000 Series Field Work Station notebook computing platforms and the technology
incorporated in such platforms and a Patent Cooperation Treaty ("PCT")
application covering various aspects of the 5000 Series, and the Company may
apply for additional patents in the future. There can be no assurance that any
of the Company's current or future patent applications will result in issued
patents, that the scope of the claims in any patents issued to the Company will
prevent competitors from introducing competitive products or that any patents
issued to the Company would be enforceable if challenged. In addition, even if
patents for which the Company has applied or applies in the future are
ultimately issued, other parties may hold or receive patents that contain claims
covering other technology included in the Company's current or future products
that could hinder or prevent the sale of the Company's products or require the
Company to obtain licenses to such technology, which might not be available an
acceptable terms or at all.
In addition to patents, the Company intends to rely upon unpatented trade
secrets and know-how and on the expertise of its employees. Although the Company
believes that it has in the past taken, and intends in the future to take,
appropriate steps to protect its unpatented proprietary rights, including
requiring that its employees and third parties granted access to the Company's
proprietary technology enter into confidentiality agreements with the Company,
there can be no assurance that these measures will be sufficient to protect the
Company's rights against third parties. Likewise, there can be no assurance that
others will not independently develop or otherwise acquire unpatented
technologies or products similar or superior to those of the Company.
The Company claims trademark rights in five marks used in connection with
its products in the United States trademarks and filed for registration in June
1996. United States trademark rights are acquired by use rather than by
registration, and there can be no assurance that others do not have conflicting
or superior rights to the Company's trademarks. The Company is aware that there
are third parties that have claimed or may claim superior rights, in certain
territories in the United States, to the use of certain of the marks in which
the Company claims rights; there can thus be no assurance that no third party
will contest the Company's right to use or register its trademarks. In addition,
the U.S. Patent and Trademark Office can deny registration to trademarks that it
determines are "merely descriptive" or "generic". There can thus be no assurance
that. any of the trademarks covered by the Company's applications for
registration will be found registrable, that registrations will issue, or that
the Company can support the cost of defense of its trademarks.
The Company licenses' from third parties certain software that it includes
in its products. If any such licenses were terminated, the Company could be
required to license similar software from other third parties; there can be no
assurance that the Company could do so in a timely fashion, on acceptable terms,
or at all.
The high technology area frequently features disputes over intellectual
property. The Company may in the future be required to defend its intellectual
property rights against infringement, duplication, discovery and
misappropriation by third parties or to defend itself against third-party claims
of infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
costs to, and a diversion of effort by, the Company. An adverse determination
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from or pay royalties to third parties or require
the Company to develop appropriate alternative technology. There can be no
assurance that any such licenses would be available on acceptable terms or at
all, or that the Company could develop alternate technology at an acceptable
price or at all. Any of these events could have a material adverse effect an the
Company's business, financial condition and results of operations.
<PAGE>
NEED TO ATTRACT AND RETAIN KEY PERSONNEL
The success of the Company is dependent on its ability to attract and
retain personnel needed for its business. The Company's personnel needs include
highly trained personnel for such areas as management, sales and engineering.
Qualified individuals in such areas are in high demand and are often subject to
competing employment opportunities. In addition, as the Company increases its
product offering, production and sales levels, it will need to attract and
retain additional qualified skilled and unskilled workers for its manufacturing
and related operations. In recent years there has been great demand for
qualified skilled and unskilled employees in the Minneapolis area, where the
Company's manufacturing operations are located. There can be no assurance that
the Company will be successful in attracting and retaining the personnel needed
for its business. Any failure to do so would adversely affect the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
In the year ended January 4, 1998, international sales of the Company's
products represented approximately 25% of the Company's net sales. International
sales are subject to inherent risks, including longer payment cycles, greater
difficulty or delay in accounts receivable collection, U.S. and foreign import
and export restrictions and tariffs, the burdens of complying with a variety of
foreign laws, potentially adverse tax consequences, potentially inadequate
protection of intellectual property rights, restrictions on repatriation of
earnings, and exposure to increased political and economic instability. In
addition, the Company's net receipts from international sales are typically
lower than net receipts from domestic sales as the result of the Company bearing
some of the cost of foreign import tariffs and the time required to collect
foreign sales receivables is generally longer than that required for domestic
receivables. The loss of a key foreign distributor or the inability to maintain
a foreign distribution network could have an adverse effect on the Company's
business, financial condition and results of operations.
All of the Company's export sales are currently denominated in United
States dollars. An increase in the value of the United States dollar relative to
foreign currencies could make the Company's products more expensive and,
therefore, potentially less competitive in foreign markets. In the future, if
the Company's export sales were to be denominated in local currencies, foreign
currency translations may contribute to significant fluctuations in the
Company's financial condition and results of operations. If for any reason
currency exchange or price controls or other restrictions on foreign currencies
were imposed, the Company's business, financial condition and results of
operations could be materially adversely affected.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
In order to meet its needs beyond the end of 1998, the Company may be
required to raise additional capital. There can be no assurance that sufficient
capital will be available if and when required on terms acceptable to the
Company, if at all. Any additional equity financing may be dilutive to existing
shareholders, and any debt financing may involve restrictive covenants. Failure
to secure additional financing if and when needed could adversely affect the
Company and its operations, including requiring the Company to delay, scale
back, or eliminate market expansion activities and research and development on
existing or new products, or forcing the Company to cease operations entirely.
The foregoing review of factors pursuant to the Act should not be construed
as exhaustive.
